Page 56 - 5.2 i. Manac Finance ITC Summarised Notes
P. 56
COST OF CAPITAL
Debt (kd)
Example 2:
C Ltd has a loan with a book value of R2 500 000. The loan
matures in 4 years time and carries interest at a rate of 12%
per annum. The current long term interest rate for a similar
loan is 13%. The tax rate is 28%. Calculate the current
market value of the loan.
Pmt = 2 500 000 x 12% x 72% = -216 000
FV = - 2 500 000
n = 4 NOTE:
The current after tax cost of debt is used
i = 13% x 72% = 9.36% and not the cost of debt at which the
PV = R2 442 143 company originally acquired the debt.
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