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  1. Hi There,
    In your WACC calculation for example 10 please correct me if I’m wrong but it looks like you forgot to include in your calculation Kd(1-T) – the cost of debt.

    The WACC should be 13.18% instead of 13.56%.

    Please let me know your thoughts.

      • Hi
        Please advice how answer 18.6 % came acca p4

                         Ordinary shares, par value $1 600 Retained earnings 22,400 10% loan notes1,000 7% preference shares, par value $1 1,000

        The current ex div ordinary share price is $5 per share. An ordinary dividend of 80 cents per share has just been paid. The dividend paid 2 years ago was 70 cents

        The current ex div preference share price is 90 cents.

        The loan notes are redeemable at par in 3 years’ time. They have a current ex interest market price of $95 per $100 loan note.

        Tax is 30%.

        Calculate the current weighted average cost of capital

        The correct answer is

        18.6%

  3. HI Sir, i can’t find the online lecture for chapter 8: Valuation of Debt Finance,Macaulay Duration

    or is there any answer on the example can be found out / dowload?

  6. Sir, what exactly is redemption yield? Does gross redemption yield = Return to the investor( Which is IRR without considering tax) while net redemption yield = Cost of debt to the company.
    Also, in eg 1 in Chapter 8, why have we not considered the initial outflow of $100? Thanks for the help 🙂

    • Yes – gross redemption yield is the return to the investor.
      (Net redemption yield would be the cost of debt, but we don’t call it net redemption yield!)

      With regard to question 1 in chapter 8, we are calculating the current MV of the bond, which is the PV of future expected receipts. (The $100 is simply the nominal value).

      (For this, it might help you to revise the F9 chapters on the valuation of securities)

      Incidentally, I notice that in the lecture I refer to 2 questions in Section A. I must re-record it because that has of course changes and there is now just one question of 50 marks.

  7. Not a query. Just wanted to congratulate you, sir, for having been conferred with the Editors Special Award by PQ. Couldn’t be happier. You always teach everything in such a logical manner that it rids us of the need to blindly memorise formulae. Became a big FAN of yours ever since I watched the lecture on variance in f2 😀 Kudos!!

  8. In relation to the IRR calculation –

    Is it really a must that we guess percentages (in this case 10% and 5%) that will give us both a negative AND positive NPV? or can we also just as well calculate IRR after using percentages that give us NPVs that are BOTH positive?

    • No – it is not a must. You can still approximate to the IRR (it is always an approximation anyway) if you have two positives or two negatives. But having a positive and a negative will give a better approximation.

      That would not lose marks, provided they were not silly guesses. What I mean is that suppose you guessed at 5% and got an NPV that was enormously positive, then it would be a bit silly to make a second guess at only 6%. 10% or 15% would have been more sensible.

    • There is no need to apologise – I can understand it must be harder if you have not taken F9.

      I am not sure which NPV you mean.

      However, I really do suggest that you watch the free F9 lectures (all except those on working capital, which is not examined at P4) – especially those on project appraisal, cost of capital, capital asset pricing model, and foreign exchange risk. So much of P4 is a repeat of F9 (and most of the extra topics do not make much sense unless you are happy with the ones from F9).

  10. Hello Sir ,
    I am a bit confused on the calculation of market values of debt and equity for WACC in example 10. market values are calculated on ex price or cum price of debt and equity ?

  12. Hi sir.This one is regarding MACAULAY DURATION . in bpp text it says when yield decreases duration increases but in an example i did(opentuition notes.ch8.Example4) lowering the yield has now effect on the duration.Why is that ?

  13. Hi sir.
    In Macaulay duration limitation you wrote that bond prices decreases as interest increases but using formula P0 = I / Kd
    as we increases interest the market value increases?
    Please help me with this how does interest increases decreases bond market price

    Thank You 🙂

    • It is investors who fix the market value of a bond from day to day, and it determined by the receipts that they are expecting and the rate of return that they require.

      Here is a very simple example:
      Suppose there are 5% bonds. On a $100 dollar bond, the interest is fixed at $5 per year. Suppose someone is thinking of buying a bond today on the stock exchange, but today they require return of 10% on their investment (maybe because banks are paying interest of 10%). Since the will only be getting $5 a year, they will only be prepared to pay $50 – because then the $5 a year will be a 10% return.

      The higher the required return, the lower the market value will be on the stock exchange.

  14. Hi.
    In the revised notes of chapter 8- the valuation of debt finance and macauley duration
    Example 2 and 3, where did you get $110 as redemption of the bonds??
    I got $110 as i assumes the nominal value being $100 and i added 10% to it?
    Please explain??

    • This is not a mistake at all – we do not claim to have lectures on every topic for any of the papers. All of the topics are covered in the Course Notes and in your Study Text (it is made very clear throughout this website that Course Notes are not meant to replace Study Texts).

      We provide this website free of charge in our spare time. Lectures are added as time permits.

      As to saying that you cannot rely on the lectures – of course you can rely on the lectures. But again, we do not claim to have lectures on every topic. If you want lectures on every topic immediately then you will need to pay to attend some course somewhere.

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