Is the relevant cost of debt when calculating WACC the interest rate on the existing debt or the rate on the new debt?

Is the relevant cost of debt when calculating WACC the interest rate on the existing debt or the rate on the new debt?

Because interest is tax deductible, the relevant cost of (-Select-outstanding, secured, or new) debt used to calculate a firm’s WACC is the (-Select-after-tax or before-tax) cost of debt, rd (1 – T).

Why is the relevant cost of debt the interest rate on new debt not that on already outstanding or old debt?

Why is the relevant cost of debt the interest rate on new debt, not that on already outstanding, or old debt? The rate at which the firm borrowed in the past is irrelevant because we need to know the cost of new capital.

Is the relevant cost of debt the interest rate on outstanding debt or the interest rate on new debt Why?

It is important to emphasize that the cost of debt is the interest rate on new debt, not outstanding debt. We are interested in the cost of new debt because our primary concern with the cost of capital is its use in capital budgeting decisions.

What is the relevant cost of debt for a corporation?

However, the relevant cost of debt is the after-tax cost of debt, which comprises the interest rate times one minus the tax rate [rafter tax = (1 – tax rate) x rD]. To calculate the cost of debt, a company must determine the total amount of interest it is paying on each of its debts for the year.

Why is debt cheaper than equity?

Debt is cheaper than equity for several reasons. However, the primary reason for this is that debt comes without tax. The interest is on the debt on the earnings before interest and tax. That is why we pay less income tax than when dealing with equity financing.

Which is the most expensive source of funds?

Common stock

What is the cheapest source of finance?

Shareholders funds refer to equity capital and retained earnings. Borrowed funds refer to finance raised as debentures or other forms of debt. Retained earnings are the part of funds which are available within the business and is hence a cheaper source of finance.

Which is better equity or debt?

The main benefit of equity financing is that funds need not be repaid. However, equity financing is not the “no-strings-attached” solution it may seem. Since equity financing is a greater risk to the investor than debt financing is to the lender, the cost of equity is often higher than the cost of debt.

What is the source of funds?

Source of Funds (SOF) Refers to the origin of the particular funds or any other monetary instrument which are the subject of the transaction between a Financial Institution and the customer. Alternatively, another definition of SOF is the origin and means of transfer of monies that are accepted for the account.

How do you find the source of funds?

When investigating source of funds, you may ask for documents, for example:

1. bank statements.
2. receipt of a redundancy payment found in the agreed final settlement from the employer.
3. sale of an asset details in the completion statement.
4. divorce settlement and court order specifying the written settlement agreement.

Why do banks ask for source of funds?

In short, asking for a source of funds means asking where your money comes from – to show that your hard-earned cash comes from a legitimate source – be it from your salary, profits earned from your business, a loan from the bank and so on. Loan. Company Sale.

Can my bank ask where you get money?

They are required by law to ask where large cash deposits come from and inform the HM Revenue & Customs. They can if they think it might be the proceeds of crime, money-laundering, or something similarly dodgy. They can ask, but you don’t have to answer.