1. In kaplan textbook, it says that collar is cheaper and more flexible than option.
However , collar is both cap and floor meaning purchasing and selling call option and put option. This means a person using collar must pay premium twice.
Moreover, if it is cheaper and more flexible than an option, why do people use an option when they can utilize collar ?
2. For wacc, we show we utilize post tax cost of debt, however when we obtain just a cost of debt, we get the pre tax basis since we cant get the benefit of tax shield ?
Can i understand along this line for the question number 2
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7y ago#11. It does not mean paying a premium twice - the whole point of a collar is that since we are selling an option we receive a premium which we set of against the cost of buying an option.
I explain all this in my free lectures.
2. The cost of debt is always calculated post tax. If you are asking with reference to APV calculations, then we discount the tax benefit at the pre-tax cost because that is the rate applicable to the level of risk. Again, I explain this in my lectures.
It seems clear from this and other questions that you have asked, that you are not watching my free lectures. You really cannot expect me to keep typing out what I have spent time already explaining in my lectures!!!
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