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How should we treat preference shares when it comes to the gearing ratio? Do we include preference shares and bank loans when calculating WACC? If we do, what price do we take – issue price or current trading price? Thank you
We certainly do include preference shares and bank loans when calculating the WACC.
The cost of preference shares is calculated in exactly the same way as the cost of equity (except that there is obviously no dividend growth and is therefore just dividend / market value).
Bank loans to do not have a ‘price’ because they are not traded. The amount is the amount of the loan (on the SOFP) and the cost is the after-tax rate of interest being charged on the loan.
Have you watched my free lectures on this? The lectures are a complete free course for Paper F( and cover everything needed to be able to pass the exam well.
Thank you for your answer. I watched all your lectures, and they are very helpful. Thank you
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