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May I ask you about the mock paper Q1, this was the question from Sep/Dec 2016 Morada Co.
According to the second director proposal, he suggested to raise one more debt of $70m through issuing four-year redeemable bonds with coupon rate 6.2% annual. So, the cost of bond became 6.2% due to he credit rating drop to Ca3 and thus rated to 240 basis point plus 3.8% risk free rate.
For the WACC result, why the cost of bond 6.2% would be used for the full redeemable bonds (120m + 70m).
Since my understanding is that the 6.2% cost of bond used for the new issuing bond 70m, but the original bond with 4.7% (3.8%+0.9%) cost of bond should still be here.
Could I calculate the WACC under second director’s proposal as follows:
12.3% x 360/556.4 + 4.7% x 0.8 x 126.4/556.4 + 6.2% x 0.8 x 70/556.4 = 9.44%?$360m is MV of equity, $126.4m is MV of bond before implement any proposals, $70m is new MV of bond, total 556.4.
Thanks!
Sorry, I know the reason that the rating changed would lead to the original cost of debt changed accordingly.
So they both became $100 bond value and 6.2% cost of bond.What you have written is correct, except that I do not know where you are getting 4.7% from in your calculation of the WACC.
Under the second directors proposal the cost will be 6.2% x 0.8 for all of the debt.
Have you checked against the examiners own answer?
Thanks for your reply!
4.7% is the first calculated cost of bond without implementing any proposals, I am not sure why the 4.7% cost of bond disappear and became 6.2%.
But now I realized due to the credit rating changed to Ca3, so full of the debt changed accordingly.
Otherwise, the 4.7% of the bond should be included in the WACC calculation if the credit rating remains unchanged.
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