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Sep Dec 2016 Q1
I just attempted Morada Co. and here I was thinking estimating the Kd required an IRR estimate when all I needed to do was add their credit rating to the current Rf. Wasted precious time gaining zero marks.
Can you please clarify why this was wrong approach.
Two reasons:
Firstly to calculate the IRR, you would need to know the market value of the debt, and this is not given.
Secondly, the wording in the paragraph second from the end of the question specifically says ‘for the purposes of calculating the cost of capital, it can be assumed that the debt beta is zero………..’.
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