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Why do we ignore the bank interest payments when Evaluating the cost of borrowing to buy for Q1 part a. I correctly calculated the figure all bar the loan interest which I added as a cost per year of 8.6% each year. This is a cost of finance which wouldn’t be paid without the loan so why is it ignored?
Em
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to me i think the bank interest has not other cost attached and it is a safest form of borrowing….
Bond and Debenture has special request attached to them
Bank interest is included in the discount rate. Think about where the 6% discount comes from…we wouldn’t have this if not for the money being borrowed. By using the CF from the loan in the evaluation as well you are essentially double counting the loan payments.
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The new technology was financed fully by Loan … and bank have a tax relief on interest according to M&M (with tax)
so 8.6% loan would be taxed (8.6% *(1-0.3)) = 6.02%
because the new technology doesn’t require issuing of new share … it cost involve for getting a new technology is 6%
If the new technology was financed by Share and Finance .. then we would have used WACC .. sorry for earlier on note .. i look at a different question …All the best tomorrow
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