Robson co – Kd calculation

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January 12, 2023 at 4:26 pm #675764
Nandhakrishnan
Participant
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In Robson co, why is interest rate taken directly as the cost of debt.
Kd= i*(1-tax rate)
Shouldn’t the above formula be used to calculate cost of debt in terms of bank loan.
January 12, 2023 at 9:49 pm #675781
John Moffat
Keymaster
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You will have to tell me which exam the question is from – I cannot remember the name of every question in every exam 🙂
January 13, 2023 at 2:58 am #675788
Nandhakrishnan
Participant
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June 2021-AFM
ROBSON CO
APV calculation
Actually, it is a general question. In most of the questions from the APV part, the bank loan rate is directly taken as the Kd( cost of debt).
Kd=i*(1-t)
Why isn’t this formula applied when computing the kd from bank loan.
January 13, 2023 at 8:46 pm #675857
John Moffat
Keymaster
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It is because the tax shield is based on the interest cost each year. Because the loan is being repaid in equal annual instalments, the interest charge change each year and therefore so to does the tax saved on the interest change each year also.
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