write an pro essay of 300 words
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The purchasing department has found an excellent global positioning system circuit card in Germany that can provide your firm with a competitive advantage in the marketplace. Delivery of the circuit cards is 6 months from date of order. The German firm has offered your firm a 2.5% discount on the €3.5 million purchase if paid up front at the time of order; otherwise, the full €3.5 million will be payable in 6 months before delivery, providing that inflation in Germany does not exceed 1.0% for the year. If inflation exceeds 1.0% for the year, the rate of inflation would be added to the €3.5 million. Find out how inflation has been affected after the European Union trade agreement and introduction of the euro. Is inflation likely to…show more content…
It shows that an additional amount of .17 million Euro has to be paid. But as the company cost of capital is 9%, it means that opportunity cost of paying earlier is 50% of 9% which is 4.5%.
Capital is the source of fiancé through which resources are provided. It may be debt financing or equity financing. The cost of debt financing is interest which is the before tax cost of capital, while after tax cost of capital is r (1-t). If suppose the interest rate is 10% and the rate of tax is 20%, it means that before tax cost of capital is 10% and after tax cost of capital is 8%.
In equity finance the cost of capital is dividend. If the rate of dividend is 10%. The after tax cost of capital and before tax cost of capital are same, which is 10% as there is no tax shield available, as the dividend is not the expense, rather it is distribution of profit