- This topic has 9 replies, 3 voices, and was last updated 10 years ago by
.
- Posts
Sir could you please help me to find discount rate for manufacturing. Thanks
You will have to say which part of the answer is giving you the problem, because there are several steps involved.
We know the equity beta for the industry. We need to ungear it using the asset beta formula (and the gearing of the industry). Then we regear it using Romages gearing to get an equity beta and hence a cost of equity.
The cost of debt is the IRR as normal.
Finally we need the real cost of capital (because we are using the real cash flows rather than the actual cash flows), so we need to use the Fisher formula to calculate the real WACC from the actual WACC.
Sir please help me with these in same question Romage.
1) For discount rate of manufacturinf why is MV debt 60 n for discount of property MV debt is 50 multiply 1.31.
2) While calculating IRR how is interest 1-15 is 8.97.
3)while calculating wacc for manufacturing division why is (1-T) not considered .
4)For calculating Mv equity why is its 50/.25
When the total value is 50 because if we divide it by .25 that will give us number of share but dont we need the total amouny.Thanks
1) The question says that the loan stock will be serviced by the property division, and the term loan by the manufacturing. So for manufacturing it is only the term loan, which is 60M.
2) The question says that the cost of the term loan and the loan stock are almost identical. The loan stock is 13%. Tax is 31%, so the after-tax interest is 13% x 0.69 = 8.97%
3) If you are referring to the formula for the WACC on the formula sheet, then you should know that the formula does not apply to redeemable debt. The cost of debt calculated is already after tax.
4) To get the total MV of equity we multiply the number of shares by the market value per share.
Sir thank you so much 1 amd 2 are clear.About point 3 just wanted to ask if debt are redeemable then in wacc formula we simply dont write (1-t ) correct.
And about point 4 what is this 50m is it not total market value. Then why for calculating MV of equity its divided by .25 should not we take 50 itself.I might be wrong but just wanted to check.
Thank you so much once again for your help.If the cost of debt has been calculated using the after-tax interest, then you do not multiply by (1-t) because the tax is already accounted for.
For redeemable debt, there is no choice but to use the after-tax interest when calculating the IRR, so we do not multiply by (1-t).If it is irredeemable, then if you want you can calculate using the interest before tax and then multiply by (1-t), although it makes more sense to use the after tax interest in which case you do not multiply by (1-t).
The 50M on the Statement of financial position is always the total nominal/par value. We need the total market value so we multiply the number of shares by the market value per share (which is given elsewhere in the question).
I have another question on Romage, can you explain this statement: In any gearing estimates the manufacturing division may be assumed to comprise 55 percent of the market value of equity of Romage and pty sale division 45 percent? I am confused because it states any gearing estimates?
- You must be logged in to reply to this topic.