Respected Sir, I wanted to know while finding the cost of debt for WACC, we used the IRR method. How do we take the approximation of the discounting rate? Basically on what basis we take the discounting rates?

Thank you for your effort! But I guess there are mistakes in the answers of the Notes (pg. 148): Example 9: When calculating the WACC, debt part uses (written) 68 instead of 3.68.

As for Example 10, WACC calculation includes the market values from the Example 9, hence, the final answer is also wrong.

We have taken account of the tax – the cost of debt was calculated after tax and so we don’t account for it again. As I explain in the lectures, the formula is only relevant anyway when it is irredeemable debt. For redeemable debt you can’t use the formula.

sir i have 2 questions regarding this lecture(Example 9 chapter 17) 1) why have we calculated cost to company on debt in part a when it is asked return to investors on debt. i mean to say is why did take tax into consideration. we could have just used the formula return to investors on debt = intererest on nominal/market value. The question in part a has not asked cost to company on debt.

2) suppose debentures were quoted at 92 cum int instead of ex int then would we subtract $8 from 92 and then use $84 in the fromula?

Those figures do not appear in chapter 7 – I assume you mean chapter 17.

In example 8, the coupon rate is 6%. The tax is 30%, and so the net cost to the company on $100 nominal is 4.20 p.a.

In example 10, the coupon rate is 10%, the tax is 30%, and so the net cost to the company on $100 nominal is $7 p.a..

Have you watched the free lectures? Because I do explain this when I work through the examples in the lecture – it is in the lectures that I explain and expand on the notes. If you are not watching the lectures for any reason, then you should not be using the notes – they are only lecture notes – and you should study using a Study Text from one of the ACCA approved providers if you are to pass the exam.

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jinansh says

Respected Sir,

I wanted to know while finding the cost of debt for WACC, we used the IRR method. How do we take the approximation of the discounting rate? Basically on what basis we take the discounting rates?

nataliazedginidze says

Thank you for your effort!

But I guess there are mistakes in the answers of the Notes (pg. 148):

Example 9: When calculating the WACC, debt part uses (written) 68 instead of 3.68.

As for Example 10, WACC calculation includes the market values from the Example 9, hence, the final answer is also wrong.

John Moffat says

Thanks – they are just typing errors which I will have corrected.

However the final answers are correct if you check the arithmetic.

Also, I calculate the answers correctly in the lectures and there is obviously no point in using the notes without watching the lectures.

Varun says

why have we not taken into consideration the the corp tax of 30% ?

the formula states Kd(1-t) {Vd / Ve + Vd} ????

John Moffat says

We have taken account of the tax – the cost of debt was calculated after tax and so we don’t account for it again.

As I explain in the lectures, the formula is only relevant anyway when it is irredeemable debt. For redeemable debt you can’t use the formula.

rakhi2rakhi says

sir i have 2 questions regarding this lecture(Example 9 chapter 17)

1) why have we calculated cost to company on debt in part a when it is asked return to investors on debt. i mean to say is why did take tax into consideration. we could have just used the formula return to investors on debt = intererest on nominal/market value. The question in part a has not asked cost to company on debt.

2) suppose debentures were quoted at 92 cum int instead of ex int then would we subtract $8 from 92 and then use $84 in the fromula?

Please help

John Moffat says

I do not work through part(a) in the lecture – only part (b). However the answer to part (a) is, of course, in the lecture notes.

If the debentures had been quoted cum int, then you would indeed use $84 in the formula 馃檪

Ibukun says

Good evening John,

Please accept this little word ”Thank you” for the wonderful lectures you gave, the exam was fine .

Thank you very much sir.

Akin

John Moffat says

You are welcome, and I am pleased that your exam was fine (and thank you for the comment 馃檪

nancy2012 says

In the example 8 and 10 of chapter 7, where is the figure 6pa 4.20pa and 7pa coming from

John Moffat says

Those figures do not appear in chapter 7 – I assume you mean chapter 17.

In example 8, the coupon rate is 6%. The tax is 30%, and so the net cost to the company on $100 nominal is 4.20 p.a.

In example 10, the coupon rate is 10%, the tax is 30%, and so the net cost to the company on $100 nominal is $7 p.a..

Have you watched the free lectures? Because I do explain this when I work through the examples in the lecture – it is in the lectures that I explain and expand on the notes.

If you are not watching the lectures for any reason, then you should not be using the notes – they are only lecture notes – and you should study using a Study Text from one of the ACCA approved providers if you are to pass the exam.