Forgetting the cost of capital

The Dom Post reports:

At a share price of $1.13 the Government has lost about $125m on its $1 billion investment.

But this was more than compensated for by $450m in dividends the airline has paid it over the past 10 years, which means taxpayers are still $325m ahead.

No we’re not. The cost of capital has been over-looked.

The Government borrows at around 6%. So if it had not sunk $1 billion into Air NZ, it would have $60 million less interest a year. And then if you compound the interest, the actual cost of the investment in Air NZ is $1.79 billion.

The current value is $875m plus $450m in divideds, which is 1.33b. So the Government is down around $460 million.

One may have a viewpoint that a loss was acceptable to keep Air NZ solvent (mind you if Cullen and Anderton had not blocked sale to Singapore Air a bailout would not have been needed), but you shouldn’t declare that the Government is $325m ahead, by ignoring cost of capital.