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I´m not sure in when in questions covering the company capital structure changes we should calculate new cost of debt/equity and new market value of debt/equity and in when we should assume them unchanged?
For instance
Question Do it yourself (Pilot paper) (question 42 in BPP revision kit). Here we are recalculating new cost of existing debt, when credit rating changes by taking more debt, but we do not change the market value of the existing debt discounting it by the new cost of debt, why? in other questions market value of existing debt is adjusted.
In this question new equity market value is also not recalculated, but changed cost of equity due to changed gearing is.
Question 36 Cost of capital (BPP kit)- here it is assumed that kd and ke do not change with gearing change.
but in Question 54 Kulpar – new cost of equity is calculated when gearing changesPlease could you give me a tip of when it is expected by examinator to assume unchanged kd/ke and market values and when not?
There is no straight answer to your question.
In so many questions at P4 it relies on what assumptions that you make. The main thing is to state your assumptions, and as long as they are reasonable then you will get the marks.
In the question from the pilot papers, the level of gearing is only small and it would not really make a significant difference.I can’t comment on the two questions from the BPP kit because I do not have a copy.
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