Sfm leasing doubt

Dear friends, I am referring sd bala sirs book for sfm. While studying lease as per sd bala sirs books cash flows are discounted at after tax cost of debt and hence interest on debt is ignored. But as per PM, pr.8 is solved using after tax costof debt but still interest on debt is deducted. I'm really confused. Please guide me. Thanks

Replies (6)

it must be tax advantage on interest on debt and not interest on debt.

INTEREST ARE ALWAYS DEDUCTED TO FIND NET CASHINFLOW. TO FIND PV OF CASHINFLOW WE HAVE TO CONSIDER RATE OF COST OF FUNDS APPLICABLE TO THE COMPANY. SAY RATE OF INTEREST TO COMPANY IS 10% BUT SINCE INTEREST IS TAX DEDUCTIBLE , THE NET COST OF FUND TO THE COMPANY IS 10 - 3 (TAX @ 30%) = 7%. SO CASHINFLOW ARE DISCOUNTED AT 7% AND NOT AT 10%. 

FURTHER WE ALWAYS TAKE WACC TO COMPANY (COST OF EQUITY + COST OF DEBT) FOR DISCOUNT PURPOSE.

           COST OF EQUITY     WEIGHT

                     12%                   40%

                      7%                    60%

WACC = 12% X 0.4 + 7% X 0.6= 9%

RATE OF DISCOUNT = 9%

 

 

INTEREST ARE ALWAYS DEDUCTED TO FIND NET CASHINFLOW. TO FIND PV OF CASHINFLOW WE HAVE TO CONSIDER RATE OF COST OF FUNDS APPLICABLE TO THE COMPANY. SAY RATE OF INTEREST TO COMPANY IS 10% BUT SINCE INTEREST IS TAX DEDUCTIBLE , THE NET COST OF FUND TO THE COMPANY IS 10 - 3 (TAX @ 30%) = 7%. SO CASHINFLOW ARE DISCOUNTED AT 7% AND NOT AT 10%. 

FURTHER WE ALWAYS TAKE WACC TO COMPANY (COST OF EQUITY + COST OF DEBT) FOR DISCOUNT PURPOSE.                               COST            WEIGHT      

EQUITY               12%                   40%                      

DEBT                    7%                    60%

WACC = 12% X 0.4 + 7% X 0.6

               = 9%

RATE OF DISCOUNT = 9%

 

Thanks for the clarifications 

If you refer RTP Nov 2015,similar kind of adjustment is there.In that problem they took after tax cost of debt and ignored tax savings on interest.But in  PM Q8,it is the other way.

These are the cases where we get confused about what is correct and what is not.Simply do in both possible ways in exam by referring to a note.

Thanks sandeep

 

 

Leave a Reply

Your are not logged in . Please login to post replies

Click here to Login / Register  

Company
08 October 2026
SALES TELECALLER

HIRE NOVA

Lucknow

Graduate (Any)

View Details
Company
05 October 2026
Senior Accountant

Vision IT Peripherals Pvt Ltd

Mumbai

B.Com

View Details
Company
08 October 2026
Account Executive

Elite Taxation

New Delhi

CA Foundation

View Details
Company
ARTICLESHIP 08 October 2026
ARTICLE TRAINEE

S.B.G. & CO. CHARTERED ACCOUNTANTS

New Delhi

CA Inter

View Details
Company
ARTICLESHIP 07 October 2026
Article assistant

S.K.Bajpai & Co.

Noida

B.Com

View Details
Company
06 October 2026
Assistant Manager - Audit and Compliance

Ravi K Jain & Co

Noida

Others

View Details
Company
08 October 2026
Accounts and Tax Associate

POOJA R TELI & CO

Pune

CA Inter

View Details
Company
15 October 2026
Senior Accountant

Continental Belting Pvt Ltd

Mumbai

B.Com

View Details