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Dear Sir,
the question says that they are going to change capital strucutre debt:equity 50 :50( no change in the business risk) . To calculate the new WACC do I have to find the new equity beta and then calcuate the new cost of equity by using CAPM?
In the answer script they have not degeared and regeared. Can you clarify?
I do not have the Kaplan kit, but I do have the original exam question and the examiners answer (and assume that Kaplan have copied it exactly).
Part (b) of the question (which is where what you write would have been relevant) specifically says to assume that the cost of equity and cost of debt do not alter.
Had it not said that, then indeed you would need to degear and regear.Hi Sir,
i refer to the same question : Semer (i refer to LSBF Revision Kit Version as i can’t find the original answer from any website)
I am confused on the following:
1. in question a)
1.why we need to ignore the interest rate/ interest paid on bank loan when we calculate the cost of debt?
2.why we cannot use the growth model to calculate cost of equity as question got mention growth rate already?2. In question b)
as question already mentioned that assuming Ke and Kd do not alter, why the asnwer use the cost of debt 3% (why not 8%) when calculated the new estimated WACC?And where can we dowload the original question and answer for those very old past year question as most are not available in ACCA website already.
1. The question does not say anywhere the interest payable on the bank loan, and so there is no choice but to assume that the cost is the same as that for the debentures.
2. CAPM is always the best way of estimating the cost of equity – this is given in the question.
3. 8% is the coupon rate (the interest on nominal value). The cost of debt to the company is the same as that calculated in part (a) of the question i.e. 3%
Our free Study Guide suggest how to try and find old ACCA exams.
(I do suggest that you watch my free lectures on the cost of capital)
hi Sir, Thanks for your clarification
you reply on my 3 question : 8% is the coupon rate (the interest on nominal value). The cost of debt to the company is the same as that calculated in part (a) of the question i.e. 3%
and i refer the the original question : “assuming that the cost of equity and cost of debt DO NOT ALTER, estimate…………………..”
i am just confused the meaning of DO NOT ALTER. do not alter mean i following the figure given in the question which is 8% (mentioned in the question near the part before the calculation of WACC 10.56%), or i need to used my own calculation answer which is part (a)
The cost of debt is never 8% – this is the coupon rate which is not the same as the cost of debt.
The cost of debt is 3%
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