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Sir in proposal 1 they said interest paid on total amount borrowed will increase the coupon rate by 25 basis points so why they have not multiplied by 6.25% ie increasing the coupon rate of 6% rather directly multiplied by 0.25%.2)..the opportunity cost taken is 25m but that is nbv of the asset . .. i thought as it should be taken as 27m which is the disposal proceeds as they will not be invested in the additional assets and earning return of 15% rather than NBV please guide
1. The are currently paying 6% on borrowing of $140M. In future they will be paying 6.25% interest on borrowing of $160M. You can calculate the extra interest in more than one way, maybe you would prefer the following:
current: 140 x 6% = 8.4M; new 160 x 6.25% = 10M. So the extra interest is 1.6M per year.
After the tax saving of 20%, the extra is 1.6M x 80% = 1.28M.
This is the same in total as the examiners answer (0.96M + 0.32M = 1.28M)2. the 25M is not an opportunity cost. The SOFP always shows assets at their NBV and so if they are sold then the NBV reduces by 25M. This is a financial accounting rule 🙂
(See the examiners tutorial note in the answer – it is in italics under proposal 3 of the explanations.)
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