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The Coeden Co Question in the revision kit.
1. Please help me clarify WACC Calculation before implementing the proposal, What is the 0.5 they used to multiply with the cost of equity and cost of debt.
2. help me clarify the asset beta calculation for hotel services and overall asset beta for coeden.
3. where does the $12.6m they use for calculating the Total value after implementing the proposal come from?
1. We always calculate the WACC by weighting the individual costs by the proportions of total market values of each source of finance.
Since the total MV’s of equity and debt are approximately the same, the weighting is equal – i.e. 0.5.
2. I assume that you have watched my free lectures on CAPM, in which case you should remember that when combining two streams, the total beta is the weighted average of the individual betas. Here we know the total beta and we know the beta of property services, so we can calculate the beta for hotel services. I do several examples of this in my free lectures.
3. The 12.6M is the nominal value of the bonds. Current the nominal value is 42M, but the first paragraph of the question says that 70% will be repaid. So the remaining 30% have a nominal value of $12.6M.