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Hi, I had some doubts while solving the kit pls help.
1) Are lease rental and license fee tax allowable ( I mean should we include them in the tax saving calculation ) ?
2) if the purchase option would be financed by debt and cost of debt for interest payment and WACC was provided, what would we use?Thank you in advance!
1. Unless obviously the question said different, then you would assume that both the rental and the license fee are tax allowable.
2. When deciding whether to lease or buy, we discount both the lease flows and the buy flows at the post-tax cost of debt to see which is the cheapest.
If the question later wants you to appraise the project itself, then we discount the project flows at the WACC.Thanks a lot for the quick response. Could you please explain the logic of it?
And yes I’ve went through all of your lectures. you’re amazing. Thank you once again for all the efforts.
As far as the rent and license fee being tax allowable, it is not a question of logic – it is simply the rules set by the tax authorities.
As far as comparing between lease and buy we discount the flows at the cost of debt because that is the simplest was of deciding whether the effective cost of leasing is more or less than the cost of borrowing.
As far as appraising the project at the WACC is concerned, the logic is the same as always for appraisal – that we need the project to generate a return sufficient to cover the overall cost of finance taking into account the fact that it is not just the interest on any borrowing that needs tone covered but also the extra required by shareholders due to changes in the gearing.
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