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I’m confused as to why even the 2008 EVA is calculated using the gearing ratio of 2007, Why is that? That’s all.
The EVA in 2008 has been calculated using the equity and debt values of 2008.
The WACC has been calculated using 2007 values, because there is no alternative but to assume that it stays unchanged.
Oh I see, thanks, can you please tell me one more thing this is from december 2007, Q5 Airline Company (b), how is that increased cost of debt(including the new debt) 4.4% is calculated?
And secondly it also says that market yield of our current debt and coupon is equal @ 4% so the book value is equal to market value of our current debt, how does that work?
Edit: it also says that if company issues debt market feels that company thinks shares are undervalued?? Secondly can you suggest a source from where I can understand such basics of stock markets?
The question says that if the issue proceeds then there will be a 90 basis point spread. At the moment it is 50 basis points, so it means that it will be 40 more. A basis point is 0.01% so it means it will be 0.4% more than it is at the moment (at the moment it is 4%).
The coupon rate is the interest rate on the nominal value.
The yield is the return required by investors.
The market value of debt is the present value of future receipts discounted at the investors required return. If the coupon is X% and the required return is X%, then discount the interest at the same rate as the interest will mean that the market value will be the same as the nominal value (i.e. book value).(To make it clear: suppose you have a bond with a nominal value of $100 and the coupon rate is 5%. That means that the interest is $5 a year.
If investors want a return of 5%, then the present value of $5 a year will be $100 – the market value will be $100).
If investors want a higher return than 5% then the market value will be lower than $100. If they will accept a lower return then the market value will be higher.
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