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Hi John,
For question Coeden, there is a Redeemable Bonds 5.2% with par value total = 42m and cost of debt calculated in question = 4.9%, tax = 20%
In the answer, the market value of debt was calculated as :
($5.20 × 1/1.049) + ($5.20 × 1/1.0492) + ($105.20 × 1/1.0493) = $100.82
Total value = $42 million × 100.82/100 = $42,344,400I dont understand why the interest $5.2 is not taken into account with tax. Shouldn’t the market value of debt used for WACC to be ex-interest? From what I understand, the calculation should have been: ($5.20 x 0.8 × 1/1.049) + ($5.20 x 0.8 × 1/1.0492) + ($5.2 x 0.8 × 1/1.0493) + ($100× 1/1.0493)
Also can you help confirm my understanding that the market value of equity and debt used in WACC calculation are both ex-dividend and ex-interest?
Thank you
It is investors who determine the market value, and they are not affected by company tax.
And yes – it is always ex div and ex int market values that are used in the WACC calculation.
(But ex-interest has nothing at all to do with tax – it simply means that interest has just been paid)
All of this is explained in my free lectures 🙂
Hi John,
Thanks for quick response. I understand now. However it seems that you deleted the valuation of bond video for your chapter 8 which cover this area. Can you help upload it again?
Thanks
Completely new lecture notes and lectures will be uploaded in the next few days – not because the syllabus has changed, but to improve and expand on the existing material.
So either wait until next week, or else watch the Paper F9 lectures on the valuation of securities (because this is revision of F9).
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