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Hi John,
Just found a copy of the examiners answers on my computer i must have saved earlier , strange they deleted it from their website as its showing coming soon..
Q31, Tufa Co, i Calculated the wacc as 14.67% while examiners answer was 11.16% and i can’t figure out he its derived..
My method for the Wacc is as follows.
V K V x K
Equity 169.68M * 0.1168 = 19.82MP.S 3.1M * 0.0806 = 0.25M
Bank Loan 3M * 0.544 = 1.63M
Loan Note 10.23M * 0.544 = 5.57M
Total 186.01M 27.27M
27.27M / 186.01M = 14.67%
Also, the Bank Loan interest i copied from the examiner as i didn’t know where to get it, as it says “the bank loan has variable interest rate” , the examiner used the rate 0.544 for the convertible bond, should i do this for future exams?
You cannot calculate the WACC the way that you are trying to.
Always, we get a weighted average of the individual costs, weighting by the total MV’s of each source – the way that the examiners answer has done it. (Think about it – how can the average cost be more than any of the individual costs!!).
Do watch my lectures on cost of capital calculations.
It is unusual not to be told the cost of the bank loan, however if you are not told, then you have no choice but to assume that it is the same cost as that of the other debt.
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