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Question 31: are we supposed to include the cost of bank overdraft in the WACC calculation??????????
Question 32: what should be done with variable cost inflation which was $52 every year? Are we suppose to do variable cost as 52*1.03 in year, 1 52*1.03*1.03 in year 2, 1 52*1.03*1.03*1.03 in year 3 & 52*1.03*1.03*1.03*1.03 in year 4? or something else????????
Arif,
I think you’re right on the way incorporating the inflation, that’s exactly how we should do it.On that note, Q 32a I can’t quite remember was actually selling price and variable price the same (in current term, not incorporating inflation) all of the four year? If it was not I may have given wrong answer just bacause I didn’t look at the question carefully ???
Can anyone clarify this?
@mdarifansary16 said:
Question 31: are we supposed to include the cost of bank overdraft in the WACC calculation??????????Question 32: what should be done with variable cost inflation which was $52 every year? Are we suppose to do variable cost as 52*1.03 in year, 1 52*1.03*1.03 in year 2, 1 52*1.03*1.03*1.03 in year 3 & 52*1.03*1.03*1.03*1.03 in year 4? or something else????????
yes effectively bank overdraft is a cost for the company, therefore we must include it when we calculate WACC. The WACC for question 31. is 11.69% say 12%
for question 32: inflation must be incorporated. so for each year the selling must have been inflated by 1.03 for 1st year, 1.03 to the power of 2 for 2nd year, 1.03 to the power of 3 for 3rd year and so on. And same for variable costs.
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