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THE FINANCING DECISION
Financing decision
Second decision:
What is the cheapest form of debt finance?
The choice between the different debt financing alternatives will depend on
which source of finance renders the lowest after tax cost (%) for the company.
Methods:
• Net present value method
Calculate the NPV of the relevant financing cash flows (including the tax
implications) using the after tax cost of new debt.
The source of financing with the lowest negative NPV / highest positive
NPV will be the source of financing with the lowest cost.
• Internal rate of return method
Input relevant financing cash flows (including the tax implications) into the
calculator and compute IRR.
The source of financing that has the lowest IRR will be the source of
financing with the lowest cost.
Calculator Steps !!
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