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Hello sir,
If you have a question wacc where an 8% bank loan is part of the capital structure and is partly fixed and partly variable…. and yu have 7% bond in issue… what is the cost of the bank loan to be used in the watch computation….
If you have an 8% bank loan then the fact is is described as an 8% loan means that the interest is fixed at 8%.
The cost of the bank loan is 8% x (1-T) where T is the tax rate.As far as the exam is concerned, variable interest would normally apply to short-term finance (overdrafts) which would only be relevant for the WACC calculation if the overdraft was intended to be continued in the long-term.
If that were the case then there isn’t really a rule. Most sensibly you would try an estimate the long-term average interest rate (probably using the whatever the average was in the past) and use that (after tax relief obviously).
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