Dear All…
I have gone through the new article on examiners approach written by shishir malde where i came across with few problems relating to the sample question.
1- I did not understand the calculation of WACC (discount rate). Help me understand this equation of WACC = (15.08% × 364 + 6% × 0.8 × 156)/520 = 12%.
WACC = Ke × E/E+D
Ke = 15.08%
MV of Equity = 364
MV of Debt = 156
E = ? —-> 364 is the MV of equity then what is reason of addition of (6% × 0.8 × 156) in 364.
2- As the NPV of the whole project is Negative 9,359,000/-. So if we calculate the value of the project with SIC’s offer to buy the project on completion of the two years development phase then why examiner has deducted whole negative NPV figure (9,359,000)? As negative NPV (9,359,000) relates to the whole 5 years project and SIC’s offer to buy the project is after completion of the two years development phase.
I hope i made my questions clear, please help me out.
Thanks
I have gone through the new article on examiners approach written by shishir malde where i came across with few problems relating to the sample question.
1- I did not understand the calculation of WACC (discount rate). Help me understand this equation of WACC = (15.08% × 364 + 6% × 0.8 × 156)/520 = 12%.
WACC = Ke × E/E+D
Ke = 15.08%
MV of Equity = 364
MV of Debt = 156
E = ? —-> 364 is the MV of equity then what is reason of addition of (6% × 0.8 × 156) in 364.
2- As the NPV of the whole project is Negative 9,359,000/-. So if we calculate the value of the project with SIC’s offer to buy the project on completion of the two years development phase then why examiner has deducted whole negative NPV figure (9,359,000)? As negative NPV (9,359,000) relates to the whole 5 years project and SIC’s offer to buy the project is after completion of the two years development phase.
I hope i made my questions clear, please help me out.
Thanks