FIN.10:4.3 - Put prices on a comparable basis without losing timing

Begin with net cash the corporation can use after issuance costs, withheld fees and any temporarily restricted proceeds. Then lay out the complete payments, recoverable deposits and other financial consequences. For a conventional loan with one initial net receipt and later payments, the effective financing rate is the rate that makes the present value of those payments equal to that receipt. Use their actual dates and a stated annualization convention. This rate reveals the effect of fees or amortization hidden by the coupon.

For irregular or state-dependent cash flows, a single rate can be incomplete or even have several mathematical solutions. Retain the cash schedule and compare supported present values, scenarios or contingent claims under FIN.5–8 as applicable. A promised yield can differ from the financier’s expected return when repayment is uncertain. Neither that yield nor the borrower’s average corporate WACC is automatically the right discount rate for every financing consequence.

Tax effects require the applicable entity, deductible amounts, use limits and payment dates. If a deduction cannot be used now, do not mechanically reduce today’s cost by the headline tax rate. FIN.5 supplies the qualified treatment of tax shields and risk. Keep their value either in the selected valuation or as an explicit separate effect, with no second credit for the same saving. A comparison before tax can be sufficient when tax consequences genuinely match or are immaterial to the question.

Compare identical financing service where possible. Two loans raising the same money now but repaying at different times provide different duration and liquidity support. The smaller nominal total payment can simply reflect earlier return of principal. If amounts differ, identify the use or cost of excess funds rather than choose the smallest rate without regard to need. If currency differs, incorporate actual conversion and any selected hedge; the lower foreign-currency coupon alone cannot rank the offers.