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Hi SIr I refer to few example in this chapter and have some queries in your answer of example:
Example 2 answer, is the free cash flow answer should be 228?
Example 3 answer, WACC for B , why we no need deducts tax 30% from 7% cost of debt?
Example 4 answer, why the shareholder of Nairobi only gain 4 (why not 7) if the acquisition goes ahead? How to get the answer of 4?
Example 2 answer: Yes it is 228. (There was originally a typing error here, but it was corrected last month – you must have already downloaded the notes. Sorry 🙁 )
Example 3 answer: The cost of debt is given in the question as 7%, and the cost of debt is always calculated after tax. So we don’t want to subtract tax again when calculating the WACC. (Maybe you are thinking of the WACC formula on the formula sheet which is misleading – tax is only relevant in that formula if we are given the return to debt lenders and the debt is irredeemable.)
Example 4 answer: Ooops. You are correct and the gain should be 7 (not 4). I will have the answer corrected (and thanks for spotting it).
Also, I now realise there is another error in the answer in that the cost of debt is 8% (and not 5.6%) for the same reason I explained in my reply above about example 3 🙁Regarding the cost of debt that u explained above, does it mean the every time given by question, we must always assumed that That cost of debt is always after tax?
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