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  1. avatar says

    John,

    I’m a little bit confused. When calculating WAAC, I got 6.33%

    On Equity I calculated as 41/45 times 12% = .1093
    Bond 4/45 times 7% = 6.22

    In your calculation, to get 10.93. Unsure how you got 10.93 for one and .62 for the other. Please explain. Kind regards.

  2. Profile photo of nkmile64 says

    Thank you Sir for this excellent lecture. Just two short questions which although probably answered somewhere else it seems that I’m unable to grasp. First, the Examiner, in his model answer, uses as the two guesses for the IRR the percentages of 6% and 8% respectively. Is there a rule for choosing these two specific ones? Are we going to get negative marks for choosing two different ones?

    And again the question about including or not an overdraft (O/D) balance in the calculations. I noticed that the Examiner in his answer mentions that either way is valid and will get full marks. But that was back in June 2010. Is this assumption still valid?

    Thank you.

    • Profile photo of John Moffat says

      There is no rule for choosing the ‘guesses’ for the IRR.
      Any guesses are acceptable (unless, obviously, the examiner tells you which ones).

      Different guesses will give slightly different answers (because the relationship is not linear) but will still get full marks.

      With regard to the overdraft – yes, the assumption remains valid. It really depends whether the overdraft is intended to be long-term or short-term, but unless you are specifically told then you can assume either.

    • Profile photo of John Moffat says

      Sorry for not replying sooner – I only noticed your question today!

      I am not sure what you mean by invoice financing? Invoice discounting means selling an invoice to a bank and getting cash earlier. Otherwise, the only ways of reducing overdraft relating to invoices is to collect money sooner (either by offering a discount for early payment, or using a factor to collect debts.)

      However the problems are:

      Invoice discounting is only a short term source of finance. It will give you more money (and therefore less overdraft) as a short term solution, but it will not help in the long term – in this question they need long term finance.

      Collecting debts in faster is a long term solution, but the problem here is that the company needs $4M to reduce the overdraft. The receivables currently are $11.1M and so it is not really feasible that they could manage to collect debts so much quicker that they could reduce the overdraft by the required amount.

      There is no harm in mentioning them if you think of them – the marker would probably give you a little bit of credit for the ideas (but, I am afraid, only a mark or two because of what I have written above.)

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