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How do you calculate the cost of cash in an M&A funding analysis?
Answer
Cost of cash = Foregone interest income on cash × (1 − Tax Rate). When a company uses its cash for an acquisition, it gives up the after-tax interest it was earning on that cash.
Why interviewers ask this
Often the cheapest funding source today because interest income yields tend to be lower than borrowing costs. This is also why companies hoard cash for accretive deals — the opportunity cost is low.
cost of cashM&A funding