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Hello, can you please explain the following:
1.Why in official answer WACC is not calculated. All necessary info is given: ratio equity to debt is 42:58 (250:350), cost of debt is 8,4% and cost of equity is 12,5%
2. Why NOPAT is not adjusted to interest paid net of tax. Company has 350.000 of loan at 8,4%. Shouldn’t we add it back to NOPAT?
3. Why for calculation of MIRR used % returns on deposit?
4. How ROE (65.22%) was calculated? It is PAT (183.626)/ Equity invested (250.000)= 73%
or PV 2012 of equity invested is 250.000 x (1+0,125)^3= 355.957, hence ROE should be 183.626/355.957=51.6% What is wrong in my calculations?Thank you very much in advance!
1 To calculate the WACC you need to know market values of the capital and that hasn’t been given. You have been told that WACC = 12.5% (note 2)
2 The model answer started with Profit before interest, so interest did not have to be added back. If you start with profit after interest then it does have to be added back, net of the tax adjustment). So either take 262,322 x (1-0.3) = 183,625 or take 163046 + 29,400 (1 – 0.3) = 183,626
3 MIRR can be worked out by turning any pattern of flows into two flows only. Discount cash outflows to the present and invest inflows as soon as received and see what they amount to at the end of the project (terminal value). I do not think it would be wrong to assume the inflows could be invested in projects returning 12.5%. If not, the funds would have to be placed on deposit at 4.5%.
4 Return on equity = PAT/Equity invested = 163,046/250,000 = 65.22
HTH
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