Frequently, analysts and teachers
use the capitalized rate of interest
for the cost of debt when forecasting
and discounting cash flows. Others
estimate the interest payments
when forecasting annual financial
statements or cash flows based on
the average of debt calculated with
the beginning and ending balance.
Others use the end of year convention
that calculates the yearly interest
multiplying the beginning balance
times its contractual cost. The use
of one or other methods is critical for the definition of the tax savings.
These approaches are illustrated
with examples and the differences
in using them. A simple proposal to
solve the problem is presented.
