- October 13, 2021 at 12:20 pm #637616Emmanuel MashayaParticipant
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- Replies: 1
Hie there John again.
I think there is a printing error with the answer from Example 10 of the lecture notes.
I have correctly calculated my Equity required rate of return to be 14.75% and I have calculated my Debt required rate of return to be 10.1355% (I ignored the effects of Tax in my IRR computation) using discounting factors of 10% and 12% , without deducting Tax for Interest payments.
For the WACC I can see that there might have been a mix up with the answer from Example 9,as the Market Values for this exercise for Equity and Debt from my calculations were $32 million ($3.20*10 000 000) for Equity and $6.3 million (1.05*6 000 000) for Debt.
*However having ignored Tax in my computation of Debt required rate of return , my *Kd* in the WACC formula was net of Tax (30%) ,basically 10.1355%*(1-0.3)= 7.09485% (I DONT KNOW IF THIS IS ACCEPTABLE OR NOT)*October 13, 2021 at 4:05 pm #637624John MoffatKeymaster
- Topics: 57
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You are correct in saying that there is a typing error in the printed answer to that question and I will have it corrected.
The correct WACC is 13.56% as is in the lectures working through this chapter.
What you write in your last paragraph is not acceptable. As is written in bold at the end of the chapter (and as I stress in the lectures), when it is redeemable debt we calculate the cost of debt as the IRR of the after tax flows, and not as Kd(1-T).
(It seems as though you might be using the notes without watching the lectures. If so, then that is pointless because it is in the lectures that I work through the examples and also explain and expand on the notes. They are lecture notes and are not meant to be a Study Text.)
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