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the solution has considered borrowing costs computation of the whole $7.5m from 1 Feb 20X6 to 30 Nov 20X6 (10 months), whereas I have done the calculation as follows:
Borrowing costs on 10% Loan :
1 feb – 30 apr = $5.5m*3/12*10%
1 may – 30 nov = $7.5m*7/12*10%
since they have invested $2m in 4.5% Bonds from 1 Jan 20X6 to 1 May 20X6.
Is my approach incorrect? pls explain
Do you get the same answer in the back of the book? If so, then the approach is fine. If you do not get the same answer then your approach will need to be looked at.
Thanks
You need to work out the total borrowing costs for the total of $7.5m at 10% for 10 months. You then need to deduct the proceeds from the amount invested, which would be the $2m at 4.5% for 4 months.
Your approach looks to have tried to take a short cut and has missed out the 4 months where some of the funds have been invested and interest income received.
Thanks
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