[michelletsang]

Thank you for your reply. I’ve revisited the lecture notes and understood the points you mentioned.

That is why I’m confused with the approach used since 4.9% is the pre-tax cost of debt and is later used as the discount rate to arrive at the market value of debt. However, the way it calculated WACC is 10.6% x 0.5 + 4.9% x 0.8 x 0.5 = 7.3%. Here, the cost of debt suggested is Kd (1-T) where Kd = 4.9% and (1-T) = 0.8 but the debt in question is irredeemable.

As you stated, “if the debt is redeemable the cost of debt is calculated as the IRR of the after-tax interest and redemption flows to the company” but the answer did not use this approach.

[michelletsang]

Ohhh it’s related to amortisation! Got it!
Had a hard time trying to figure this out.
Thanks for the prompt reply 🙂

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