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Sir I have a doubt in the mm+ tax model . I asked this qs earlier for qs Fubuki. The kd used in the model is assumed to be risk free and thats why in qs fubuki we took risk free rate and not the normal cost of borrowing. however for qs Mlima they are taking nowmal cost of borrowing and not the risk free rate. Risk free rate is 4% and normal cost of borrowing is 7%.
Is it because the risk free rate given in only applicable to Mlima and not for Ziwa.
Thanks in advance.
I must admit that I had not noticed the inconsistency in the two examiners answers. Certainly if Mlima and Ziwa were in two different countries then the risk free rate could be different in the two countries, and since we are not told Ziwa’s risk free rate we would then have to assume that their debt was risk free.
I will query this with the examiner (but from past experience it will take a while to get a response). Best in the exam is (as with all things) just to state your assumptions.
Sir this is how I will state my assumption ” Ziwas normal cost of of borrowing is used to calculate the ungeared cost of equity and is assumed to be the risk free rate”
is this correct?
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