Question

Your company is planning to make an offer of $67 per share. You applied for low...

Your company is planning to make an offer of $67 per share. You applied for low interest loans and will receive the followings:

a) 3-years loan of $2.5 million, zero interest

b) 25-years loan of $4.5 million, 2.5% interest,

while the normal borrowing rate is 7%. How much is the interest subsidy worth?

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Answer #1

Total savings made on the interest subsidy amount to $52.38 million.

First calculate the interest saved per year on both loans. Loan 1 = 7% per year, Loan 2 = 4.5% per year

This yearly savings will be multiplied by the present value factor to calulate the PV of savings. PV factor 7% for 3 years for loan 1 and PV factor 7% for 25 years for loan 2. Refer calculation below.

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