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Hi sir, I posted a similar question in the forum but somehow cannot find it, so I am reposting it. If this happens to be the duplicate question, please just ignore it.
In Ennea Co, the question stated that “increase in borrowing will increase the coupon payable by 25 basis points on the total amount”.
In that case, why is the increase in interest be:
($20m x 6%(1-0.2)) + +($160 x 0.25%(1-0.2)) = $12.8mand not
($160 x 6.25%(1-0.2))=$8m
as the question stated the increase of 25 basis point is ‘on the total amount’?
Thank you!
They are already paying 6% on the 140 current borrowing, so will pay an extra 0.25% on this. In addition they will be 6.25% on the 20 new borrowing.
So it might be clearer for you to calculate it as follows:
(140 x 0.25% x (1-0.2)) + (20 x 6.25% x (1-0.2) = 12.8
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