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June 2, 2020 at 6:34 pm
In question 9 Part a question is asking to calculate Return to INVESTORS on Debt. so why are we taking tax into account for the same ?
We generally take tax into account when we calculate cost of capital for company. Right ?
John Moffat says
July 30, 2020 at 7:51 am
For part (a) I do not take tax into account. Only for part (b).
July 31, 2020 at 8:12 am
I too am confused in example 9. Per my understanding from the previous videos, we should have taken tax factor in consideration when we were to take company’s cost in consideration. Why have we factored tax in return to investors as well ? (example9- part a)
July 31, 2020 at 9:14 am
I do not show part (a) in the lecture. I calculate the cost of debt in order to calculate the WACC and cost of debt always means the cost to the company, which does take into account the tax.
The answer to part (a) is printed in the free lecture notes (as are the answers to all the examples).
August 1, 2020 at 8:21 am
Thank you for such prompt response Sir! I misunderstood. thank you for the clarification 🙂
August 1, 2020 at 9:57 am
You are welcome 🙂
December 5, 2019 at 1:07 pm
In example 10, I used 15% and 10% to calculate the IRR and it gave me 6.631 which seems like a big margin from the 7.51 you got using 5 and 10%. Please advice
December 5, 2019 at 4:07 pm
Using those two guesses does indeed give an IRR of 6.63%, but as I state in the lectures different guesses will give different answers because the relationship is not linear.
However, they were rather extreme guesses to have used (which is why your answer is so much different). As a very rough guide, always divide the after-tax interest by the market value. For this question it gives 7/105 = 6.67%. The actual IRR will be little bit higher because the redemption is at a premium, but there is no way it is going to be as high as 15% 🙂
July 30, 2020 at 7:36 am
Hi teacher, I used 5% and 10% then I have the same result like yours (7.51%) but when I used 10% and 15% as the friend above, but my result is [10% + (12.47 / 18.52)* 5% ] = 13.36% Please advise! Thank you!!!
July 30, 2020 at 8:03 am
The NPV’s at 10% and 15% are both negative, so the IRR cannot possibly be more than 10% !!!
The IRR = 10% – (12.47/18,52 x 5%) = 6.63%
August 28, 2019 at 4:01 pm
On page 150 of the Sep-Dec 2019 lecture notes for example 10 the Ke is given as 14.68 instead of 14.75, it looks like someone copied down the answer from example 9.
August 28, 2019 at 4:04 pm
Actually it looks like the whole answer in example 10 was copied down from example 9
August 28, 2019 at 4:52 pm
Thanks – I will check and have it corrected. However the answer in the lecture I think is correct.
February 18, 2019 at 1:03 pm
Hi there John,
In example 10 I tried this by myself and instead of using 5 and 10% to calculate the cost of debt, I used 5 and 8%. This gave me the answer, 8.02%. Have I done something wrong or should I stick to multiples of 5 or something?
February 18, 2019 at 1:06 pm
Sorry I made an error and tried it again but got 7.30% as opposed to 7.51%. do the estimates of cost of equity differ depending on the numbers you use for discounting? By that much?
February 18, 2019 at 2:53 pm
I think you mean differences in the cost of debt (not the cost of equity).
The answer (and I do say this in my lectures) is that the estimate of the cost of debt can certainly differ by that much, because the relationship between the rate of interest and the NPV is not linear. If it is were than 1% different, then it almost certainly means that you would have made a mistake.
February 9, 2019 at 8:30 pm
I’m a bit confused. During calculations of WACC, you can use both book value and market value. It is obvious that the book value will differ from the market one. In the video, the market values of equity and debt are used in WACC calculation. Which approach should be used during the exam?
Thank you in advance!
December 20, 2018 at 5:40 am
How do answer a question that indicates a company has outstanding loan notes?
December 20, 2018 at 7:25 am
Loan notes are the same as debentures and loan stock – they are debt borrowing.
Have you not watched the lectures on the previous chapter where I explain this?
November 25, 2018 at 2:31 pm
Hi john I have a question on example 9, we are asked to work out the return to investors on debt this would be 8/92 : 8.69% , we worked out the cost of debt to the company didn’t we as 6.09% (after tax)
November 25, 2018 at 4:23 pm
Correct for both 🙂
November 24, 2018 at 12:41 pm
Thank you ! Amazing Videos
November 25, 2018 at 4:20 pm
Thank you for your comment 🙂
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