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A company I'm valuing gets a significant portion of its financing via government cash grants.
Let's assume they normally spend $150m in capex annually with a 70/30 leverage ratio. With the cash grant, they'd get a 30% rebate off of their capital cost. So now their out-of-pocket capex is $105m, which they'll still leverage 70%.
In this case, what is the effect on cost of capital? 1/3 of the capital is essentially free now; does that mean if the WACC before was 6%, it now becomes 4.2% (6% * 70%)?
Thank you,
Alan Read More