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1. when the question merely says cost of equity, does it mean geared cost of equity ???
2. last time you told me that WACC has cost of debt therefore we do not include debt interest cost. However in this question it uses ungeared cost of equity which means it has not taken into consideration of debt interest.
Last time, you told me that since the free cashflow calculation do not include debt interest since WACC consist of debt interest.
However, in this question, they have used ungeared cost of equity meaning it does not include debt interest then shouldn’t the debt interest cost be included in the free cashflow calculation ??
3. for calculating annuity factor, why is it 7% and 15 years ? shouldn’t it be 3% ?i know that normal borrowing rate is 7% but shouldn’t we suppose to use the 3% of the interest rate ?
4. this may be something out of the question but, usually when company repay to debt holders, the consideration that will be passed to debt holders can be cash, shares and etc depending on the preference of the bond holder or debtor or by both parties ?
1. If the company is geared, then the cost of equity is automatically the geared cost of equity.
2. What I told you before is completely correct, and is what has been done in the answer to this question. They have discounted at the cost of capital, but the question specifically tells you to base Mlima’s cost of capital on Ziwa’s unguarded cost of equity (and the answer explains why under ‘assumptions’). They have discounted at Mlima’s cost of capital on that assumption.
3. The tax shield should be calculated at the normal cost of borrowing – the subsidy is a separate issue. It is 15 years because the loan is over 15 years.
4. Debt is repaid in cash, unless it is convertible debt in which case the lender chooses whether to take cash or shares.
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