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Page 78 example 3

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Page 78 example 3

Viewing 4 posts - 1 through 4 (of 4 total)
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  • April 19, 2017 at 10:10 pm #382745
    helensqq
    Member
    • Topics: 21
    • Replies: 13
    • ☆

    Hi John,

    WACC: your answer for cost of debt 7% x40/140=2%.
    I thought it should be 7%x(1-25%) x40/140=1.50?

    Thanks.

    April 20, 2017 at 8:22 am #382793
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54500
    • ☆☆☆☆☆

    The cost of debt is 7% because the question actually says that it is 7%!

    (We would only subtract 25% if 7% was the return to investors and the debt was irredeemable)

    Multiplying by 40/140 is part of combining it into the WACC.

    April 20, 2017 at 4:13 pm #382868
    helensqq
    Member
    • Topics: 21
    • Replies: 13
    • ☆

    Thank you John,

    But in page 79 example 4, the cost of debt is 8%, you deducted 30% of tax when WACC is calculated. Did I miss some ideas or confused?

    April 20, 2017 at 5:21 pm #382879
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54500
    • ☆☆☆☆☆

    That is my mistake and I will correct it.
    Thank you very much for pointing it out to me.

    The cost of debt should be 8% (because that it what is given in the question) and not 5.6%.

    (Again however, I do suggest that you watch the free lectures on the cost of capital).

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