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Greetings Sir,
I have tried the example 10 in the lecture notes for Cost of Capital, as suggested in your lecture. However, I had done it the way it was taught in class- the courses I was taking, that is using the WACC formula, I have noticed I got the same answer. And I understood in the explanation that followed that most debts are redeemable so Kd (1-t) does not apply, since we have to use IRR.
However, I would like to ask if in the exam (even though I know with right practice it would not happen), if we calculate the WACC, using Kd (1-t), therefore the IRR calculations involve Interest (with no tax effect), would this be considered as a mistake?It seems to wrong to calculate cost of debt as in Kd(1-t) after following the logic behind it, so this might be a very stupid question.
Thank you for your help,
Have a nice day. 🙂If the debt is redeemable then it is wrong to use Kd(1-T) when calculating the WACC and is a mistake.
As to how many marks you would lose, it depends very much on how big an issue it was compared with everything else required in the question. You should look at the marking schemes at the end of the examiners answers to get an idea of how many marks are allocated to each specific bit of questions.
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