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Hello, kindly explain to me the rationale behind using the interest rate of debts as cost of debt? I’m so confused
I am not sure which part of the answer you are referring to.
However as far as the cost of capital calculation is concerned, the only information given in the question is that they will have to pay interest at 9% on future borrowing. Therefore there is no alternative but to assume that that the cost of debt to the company is 9% after tax
(i.e. 9% x (1 – 0.28)).(Usually we are told the market value of debt, the coupon rate, and the terms of redemption, in which case we calculate the IRR of the after-tax flows to the company as I explain in my lectures (and as we did in Paper FM), but in this question none of that information is available.)
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