Question

A company has requested a $ 40 million loan from a banking institution in the country for a term of 10 years. In addition, the strategic planning management of this company estimates that inflation in the next 3 years will be 15%, in the subsequent 3 years it will be 18%, and in the last 4 years it is estimated that it will be 22%. On the other hand, the planning management considers that the banking institution thinking about the inflation rates that will prevail in the future, will charge

interest of 20% in the first three years, 25% in the following 3 years and 28% in the last four years. If the collection of this liability originated expenses of the order of $ 1,500,000, and the tax rate is 50%, what would be the real cost of this source of financing?

Answer 1

The inflation erodes the money power of the currency as a result the cost of borrwing ie the rate charged would be lesser as compared to what you had earlier

Thus to know the original cost of borrowing for each year we ll deduct

Nominal rate for first 3 years will be5 percent and simultaneously 7 percent and 6 percent

The cost of borrowing will entail multiplying the rates by (1-0.5) ie the tax rate.

Firstly we will assign the weights to the rate for example multiplying 5*3ie 15

thus in this way the cost of debt comes out to be 6 percent

Thus the cost of debt 6*0.5=0.3 ie 3 percent