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hello john
please tell me when to use MV of loans to calculate WACC.
lets say if we have company with a bank loan then we just calculate interest and divide that by the total of the bank loan on the balance sheet.
however if we have redeemable debt or irredeemable debt then calculation is based on market value of the loan.
under what other cases apart from redeemable debt or irredeemable debt do we use mv of the loan? do we also use that under debentures?
We always use the total market value of debt when calculating the WACC. There is no exception !!
If the debt is traded then we will know the market value. If it is not traded then we need to calculate the MV (the PV of the future payments discounted at the investors required rate of return). (Debentures are debt – they are the same as bonds and loan stock).
In the case of straight bank loans, then the market value is the amount of the loan.I suggest that you watch my free lectures – including the Paper F9 lectures on the calculation of the cost of capital, because this is revision of F9.
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