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Hie John,
In calculating WACC i understand the whole point is to get average cost of capital , that is from all sources of finance used by a company.and also the assumption is that sources of finance are equity and debt only. however in calculating the value of bonds of debt finance i am confused. if 1000 bonds have a market price of $72 per $100 nominal. inorder to calculate the value of these 1000 bonds initially i thought its 1000 @$72=$72000. I realised i was wrong , the answer is 1000 @0.72=$7,200. so does this mean that market price/nominal value??=0.72.
oh I now get it John.the point is to calculate market values since book values depend on historical information which may be understated or outdated. in the problem above thus 1000/100 *$72=$720.
Dear John!
If bank finances a start-up real estate project through long term loan at 4% interest rate, and this loan should be repaid through e.g. 15 years amortisation from long-term lease of this RE, while calculating the NPV of the project from the bank’s point of view (how much would the bank earn from this loan), discounting should be performed for both principal and interest payments through years, or just principal? I’m of the opinion that here we are talking about the valuation of securities…And additonal question, what should the bank use for discount rate? WACC of the bank at the time the loan is being contracted (since loan disbursement should last for 1,5 year), since the bank funds itself from debt and equity….
In case that we are calculating the NPV of the project itself, we should exclude the interest payment from discounting, and for WACC use interest rate of the bank and cost of equity of the Investor…
Thank you very much in advance!
DanijelaSorry, but this question is not at all relevant for Paper F9! You will never be asked to calculate from the banks point of view in the Paper F9 exam.
(Interest is always ignored when arriving at the cash flows – the whole purpose of discounting is to account for the interest (which is part of the calculation of the WACC).)
Yes I understand it is not relevant for the F9 exam, but it is for the real business application. I apologize, I was of the opinion that questions can be fwd and for real business application.
As a banker, when evaluating/comparing investments which we finance through LT loans, I should discount my CF’s from these projects (in order to see where is the best possible return for us), and I assume that this means (from my point of view) to discount my income realised from that particular project (meaning interest) and principle that I invest and which should be later repaid through installments….
And my (bank’s) WACC in that project in fact represents WA of bank’s cost of equity and cost of debt used for obtaining funds for this financing (my cost of debt is not related to the “interest rate” which I’m charging to a client)…
But then, to calculate the appropriate WACC of the bank is quite hard…
I do apologize if I’m writing to a wrong adress
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