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In reference to past exams Burung Co and Amberle Co.:
The subsidy benefit in Burung Co is calculated using the subsidy interest rate as 2.5%.
The subsidy benefit in Amberle Co is calculated using the [normal debt rate less the subsidy rate].
Why is this so? i.e. why in Burung Co the 2.5% was deducted from the 4% normal rate?
In Burung, the normal borrowing rate is 2.5 + 1.5 = 4% (the question says that the normal rate is 150 basis points above the government yield rate of 2.5%).
The subsided rate is 2.5 – 1 = 1.5% (the question says that the subsided rate is 100 basis points below the government yield rate of 2.5%)
Therefore the subsidy is 4 – 1.5 = 2.5% (the normal rate less the subsidised rate).
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