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Hi John, regarding the discount rate, why is wacc calculated at last? Shouldn’t discount rate be 14.86%?
Please tell me which exam it is in (I can’t remember the names of every question in every exam 🙂 )
Why do you want to use 14.86%? That is the cost of equity. We always discount at the relevant WACC (unless, of course, the question wants an APV approach – which is not asked for here – but then we would discount at the ungeared cost of equity and add on separately the tax benefit of the debt).
Hello – Can you please explain what makes this a risk adjusted WACC question rather than APV? I understand the business risk has changed due to the diversification but Sleepon has access to $450m loan which made me think that gearing has changed and therefore finance risk so it should be APV? Is there something in the way it is worded? Thank you.
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