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Cost of debt

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Cost of debt

  • This topic has 5 replies, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • May 31, 2014 at 2:07 pm #172120
    karmuks
    Member
    • Topics: 29
    • Replies: 109
    • ☆☆

    hi,

    wondering why in Dec12 Q1 calculated cost of debt before proposal is including tax? Shouldn’t it be excluding tax?

    May 31, 2014 at 5:36 pm #172172
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54718
    • ☆☆☆☆☆

    Yes, and no 🙂

    Certainly, when it says in the second line of the answer that cost of debt is 4.9%, this is actually the return to the investor and not the cost to the company (because it before tax).

    However, the examiner has used the figure correctly.
    It is the return to the investor that determines that market value of the debt (and so he was correct to use 4.9% there).
    When he calculates the WACC, he does multiply the 4.9% by (1-t) to end up with the cost to the company.

    June 1, 2014 at 11:03 am #172310
    karmuks
    Member
    • Topics: 29
    • Replies: 109
    • ☆☆

    aha, I new there must be some trick. So if I understand right we use 4.9% when calculating cost of debt which we then adjust for our tax purposes in WACC.

    And if there would not be asked for WACC, then our cost of debt would be 4.9%(1-t). Right?

    June 1, 2014 at 11:56 am #172319
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54718
    • ☆☆☆☆☆

    That’s correct 🙂

    June 1, 2014 at 1:10 pm #172335
    karmuks
    Member
    • Topics: 29
    • Replies: 109
    • ☆☆

    thank you John 🙂

    June 1, 2014 at 1:28 pm #172340
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54718
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
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