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1. for the residual value, how do we know which one to use ? because answer sheet have used 250, and i can’t understand why 300 can’t be the answer for it since the question says that it’s expected to be between 250 and 300million.
2. so far most of the questions we have solved, the cost of debt we have obtained was using bond through nominal value, number of bond duration(years), % coupon rate and rate of return to investors.
However, in this case, if the loan is used instead of bond, we merely use the rate of return to investors ???
3. i have seen your video for WACC and for calculation of Thrill’s cost of debt and market value of debt, answer sheet have used 93/100 x 460 to get 427.80.
Actually i do not understand the rationale why we can’t use 460 for market value of debt. Why do we have to multiply with 93/100 when the amount 460 shown in the statement of financial position is already market value ??
1. 250 has been used because that is the worst that can happen. If it is worthwhile using 250, then the actual outcome can only be better. Surely that it what you are likely to do in real life?
2. We are using the cost of the debt used to finance the project, which is given in note (i) of the question.
3. We always use the market values to calculate the WACC (and I always do in my lectures). The value of 460 is the value on the SOFP, which is not the market value!! You should know from financial accounts exams, that in the SOFP both share capital and debt at always shown at nominal value and not at market value.
In the question 2
2. Then for bond, they also show the rate of return for investors.(same as loan).
But why do we have to discount bond using future receipt using investor’s required rate of return ?
When loan is merely using the rate of return ??
The market value of a bond is always the present value of future receipts to the investor discounted at the investors required rate of return – you really need to watch my free lectures on this.
We have no choice here but to assume that the investors required return on all long-term borrowings is the same i.e. that it is the same for the bond as it is for the loan.
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