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  1. Hi john in real life when borrowing say for 5 years the total interest rate in figures overall for the 5 years will be higher than if i was borrowing for say 9 months but for yearly do they charge a higher percentage for interest rate yearly if i was borrowing for 5 years against if i was borrowing for 9 months which one would be higher 5 years or 9 months on a yearly bases

  2. Hi John
    Based on your answers above is it safe to assume for F9 that interest payments are only deducted when calculating WACC for Debt. Everywhere else interest payments are ignored and interest rate % is only used for Discount.

    Thanks

    • I don’t know what you mean by ‘deducted when calculating WACC for debt’!

      We never deduct interest payments when arriving at the cash flows each year, because this is accounted for in the discounting. The calculation of the WACC includes the cost of both the equity and the debt finance.

  3. Hello John
    I see your reply in respect od interests but I still can’t explain it to myself why don’t we include interests in the cash flow and would do it twice if we do that…
    Interests will be pay out by the company , we will incurr these costs out of the company’s bank account, so they seem to me to be relevant.

    I base my understanding on the debt valuation, where we do include interests and associated Costs and repayments, we then discount them using cost od debt coming to npv of the future cash flows = market value.

    I am Aware that my understanding is wrong but don’t know why…

    Regards,
    Tomasz

    • The reason for discounting projects is to account for the cost of the money – there is no other reason for doing it.

      When calculating the WACC we include the cost of the debt interest in the calculations, so this is what I mean by saying that when we discount at the WACC we are taking account of the interest.

      As far as the exam itself is concerned, then accept it as a rule. However if you are still not convinced, then in the discounting lectures for Paper F2, I go through some very simple examples to explain this.

  4. Hello John,

    Is there a reason why we didn’t use the annuity table to calculate for the lease payments? If we can use it…will we use it for 5 years as the first payment is made at the start of the year? I get $635,500 for the lease payment using 4.100. It’s a big difference if I am correct in my calculations.

    Thanks.

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