When calculating the combined pre-tax income in a merger model, what is done with foregone interest on cash?

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Multiple Choice

When calculating the combined pre-tax income in a merger model, what is done with foregone interest on cash?

Explanation:
Foregone interest is the opportunity cost of using cash to fund the deal instead of keeping it invested. In the combined pre-tax income calculation, this cost is treated as a deduction because you’re sacrificing the interest that cash could have earned. Subtracting it reflects the reduced earnings due to financing with cash. For example, if $100 million of cash could earn 6% in interest, foregone interest is $6 million, which lowers pre-tax income by that amount. It’s not income or revenue; it’s a financing-related cost, so it reduces pre-tax income.

Foregone interest is the opportunity cost of using cash to fund the deal instead of keeping it invested. In the combined pre-tax income calculation, this cost is treated as a deduction because you’re sacrificing the interest that cash could have earned. Subtracting it reflects the reduced earnings due to financing with cash. For example, if $100 million of cash could earn 6% in interest, foregone interest is $6 million, which lowers pre-tax income by that amount. It’s not income or revenue; it’s a financing-related cost, so it reduces pre-tax income.

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