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Piktor pl a company with a 31 Dec year-end
Piktor pl a company with a 31 Dec year-end. had the following general borrowings in place at the beginning and end of 20x6. 1 January 20 Em 10% Bank loan repayable 20x8 120 120 3.5% Bank loan repayable 20x9 80 80 on 1 March 20X45, Pikton ple began construction of a qualifying asset a piece of machinery for a hydroelectric plant, wie willing borrowley Experditure drawn down for stre construction was million on 1 March 20x6 and million on October 2016 Your task: (a) Calculate the weighted average borrowing rate (also known as the capitalisation rate) (b) Calculate the amount of borrowing costs that can be capillaised for the hydroelectric plant machine for the year ending st December 2006
Expert Solution
Solution:
Given:
bank rate for £120m loan= 10%
bank rate for £80m loan= 9.5%
a) capitalization rate or weighted average borrowing rate:
for £120m loan:
First year= 10% of 120= £12m
total= 120+12= £132m
Total Annual interest amount = 132-120= £12m
Similarly,
For £80m loan:
First year= 9.5% of 80= £7.6m
total= 80+7.6= £87.6m
Total Annual interest amount= 87.6-80= £7.6m
Capitalized annual rate= Total interest amount/total loan amount
Capitalization rate/weighted average borrowing rate= 12+7.6/120+80= 9.8%
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