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John Moffat.
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Anonymous
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Sir, there’s a question in BPP Investment Appraisal called Vyxyn Co. They said the project is financed by issue of 8% loan notes and the nominal after tax WACC of 10%. I know we usually use the WACC but they did say it is to be financed by the loan notes hence shouldn’t we calculate the after tax cost of debt of the loan notes to be used as the discount factor in this case ?
John Moffat
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In Paper FM we always appraise investments using the WACC. As explained in the lectures, although the cost of the debt used will be lower than the WACC, the cost of equity will increase due to the higher gearing.
(You will find in Paper AFM that we do take a different approach if there is a significant change in the gearing, but this is not relevant for Paper FM.)
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