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Page 78 example 3

This topic has 3 replies, 2 voices, and was last updated 8 years ago by John Moffat.

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April 19, 2017 at 10:10 pm #382745
helensqq
Member
- Topics: 21
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Hi John,
WACC: your answer for cost of debt 7% x40/140=2%.
I thought it should be 7%x(1-25%) x40/140=1.50?
Thanks.
April 20, 2017 at 8:22 am #382793
John Moffat
Keymaster
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The cost of debt is 7% because the question actually says that it is 7%!
(We would only subtract 25% if 7% was the return to investors and the debt was irredeemable)
Multiplying by 40/140 is part of combining it into the WACC.
April 20, 2017 at 4:13 pm #382868
helensqq
Member
- Topics: 21
- Replies: 13
Thank you John,
But in page 79 example 4, the cost of debt is 8%, you deducted 30% of tax when WACC is calculated. Did I miss some ideas or confused?
April 20, 2017 at 5:21 pm #382879
John Moffat
Keymaster
- Topics: 57
- Replies: 54684
That is my mistake and I will correct it.
Thank you very much for pointing it out to me.
The cost of debt should be 8% (because that it what is given in the question) and not 5.6%.
(Again however, I do suggest that you watch the free lectures on the cost of capital).
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