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akhalid93 says

In Examples: To calculate the Cost of Debt 8% x 0.75 is taken. This 0.75 is (1-T). The 6% answer is After-Tax Cost of Debt?

John Moffat says

Yes.

annamalai27 says

Hi sir,

In example 6,

Assuming the entire project was going to be funded by Debt finance instead of equity, how would the cost of appraising the project be determined?

a) Will it be using just CAPM , where the best we use is equal to the asset beta of the ship building company (Exactly how we do it in case the project is funded through equity , could you also tell me what is the logic in doing this if we are doing this) , or

b) Will it be based on WACC. (Again, it would be really helpful if you could show an example of how this might be calculated)

umartamoor says

Dear Sir,

In Example 5 P plc: Debt to Equity ratio of 0.4

Its mean 40% is Debt and 60% is Equity = 100%

But you solve with 100% as Equity and 40% as Debt = 140% how value of compnay above 100%

Same in Q plc

John Moffat says

Nobody is talking about %’s !!!!

It does not mean 40% is debt and 60% is equity – that would mean a debt to equity ratio os 40/60 which is certainly not 0.4!!

If debt to equity is 0.4, then for every $100 equity the debt is 0.4 x 100 = $40.

Therefore for every $140 total value, the equity is $100 and the debt is $40.

Denay says

In example 6, when calculating the beta of equity, why did you take 87.5/50 rather than 50/87.5 seeing has the formula had not changed sides?

John Moffat says

But the formula has ‘changed sides’.

We have calculated the asset beta and are using the formula to calculate the equity beta, which means reversing the formula.

guardian96 says

Hi John

In the final calculation of WACC shouldn’t we take the tax effect of debt?

toyin1234 says

Sir,thank you so much for the wonderful lectures.I would like to know if the 0.2 debt to equity in example 6 can be assumed to be 20% debt and 80% equity to make a total of 100 instead of the 100 equity and 20 debt that you used?A bit confused here sir.Thank you.

John Moffat says

No it can’t be assumed to be 20% debt and 80% equity.

If the ratio of debt to equity is given as 0.2, then it means that debt divided by equity is 0.2.

If it were 20% debt and 80% equity, then the ration of debt to equity would be 20/80 which is 0.25 !!

toyin1234 says

Thank you sir,I do get the logic now.

John Moffat says

You are welcome 馃檪