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Part (a) of the question
While calculating WACC, the examiner doesn’t take overdraft into the consideration for calculating WACC even though it is a material amount (15 million).
Any specific reason why the examiner didn’t take?Thanks.
The WACC is looking at long-term capital. Whether or not we include overdrafts in this depends on whether they are intended to remain in the long-term. Here it is not so clear and so you would not lose marks if you had included it in the calculations – as the examiner writes in his answer, it is an assumption – although there would then be a problem as to what cost to use in the calculation.
If suppose we include the overdraft, then should we take 6% and multiply it with (1-30%) to get after tax cost of debt(overdraft)?
Yes – that is correct (but you should then write a note about the fact that the interest rate is likely to change in the future) 🙂
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