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Hi there, I have a query on Dec 07 paper Qn 2 – Alpha Ltd. Im not sure about the WACC calculation. The calculations are as follows:
WACC 2006: (16% x 50%) + (10% x 0·7 x 50%) = 11·5%
WACC 2007: (18% x 50%) + (10% x 0·7 x 50%) = 12·5%In the question, it already says the pre tax cost of debt is 10% so why are we doing only 70%? (Is it not like taking tax off twice?)
Thanks
AnuAlso, under adjusted cost of capital, how is goodwill calculated under x7 as $50 million and they didn’t include economic depreciation in the answer. I dont get this? EVA is so complicated! Just when I thought I finally got it, they’re confusing me again! 🙁
Thanks again
AnuPre-tax means before tax. Post tax cost is needed in WACC, so the cost still has to be reduced by 30% to 70%
With regard to EVA:
Economic depreciation: note 8 says that the economic depreciation is the same as that charged in the accounts, so you would add back then take off the same amount: no net adjustment.
Goodwill: opening capital 2006 needs 45 adding back as that had been previously written off. Another 5 was written off in 2006, so 50 in total needs to be added back to get the capital at the start off 2007.
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