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Hi Sir, I refer to BPP revision kit answer.
i have confused with following calculation:
1. NPV answer
(i) Cost of Debt (anwwer in the revision kit is 5.6% which is directly calculate from 8%x70%)
my queries is since this is 4 year debenture, can i use the IRR method to find out the Kd which is 5.61%? (although there is no much difference in answer, i just want to know the correct way to calculate)
(ii) WACC (portion of equity vs debt is 0.6 : 0.4)
My queries is why we can’t use 0.5:0.5?
2. APV answer
(1) base case NPV : since $300k issue cost is related to equity, why we can’t include this in the calculation of base case NPV? (although the answer in the end is the same)
The current edition of the BPP Kit does not contain a question called Tampem PLC.
If it was a past exam question then if you tell me which exam I should be able to find it elsewhere.
Hi Sir, it is December 06 question which is related to your topic the impact of financing in your study guide 🙂
🙂 (I must update the Study Guide 🙂 )
1) We do not know whether the debentures are redeemed at par or at a premium, and so we can only assume that the redemption amount is equal to the original amount borrowed. In this case, the IRR will be exactly equal to 8% x 0.7 (the fact you got different is simply due to rounding). The reason we usually do have to calculate the IRR is because usually the redemption amount is different than the current market value.
2) There is a strong argument for using 50%/50% for the WACC and you would still the marks (even though the answer would be different).
3) We always exclude issue costs from the base case NPV and treat it as a financing side effect, regardless of which finance they relate to.
Sir, Thanks for your clarification.
i would like to know if in normal NPV calculation, do we need to include the issue cost? or just ignore it?
(assumed the question is not related to APV)
hi Sir, i just want to know if in normal NPV calculation, do we need to include the issue cost? or just ignore it?
(assumed the question is not related to APV)
The issue costs are not directly relevant – all that is relevant is the amount to be invested in the project.
When calculating Discount Factor for Base Case NPV, I don’t understand why the suggested solution using 50% equity and 50% debt to degear Beta asset for the purpose of Keu calculation. I thought the expected company gearing ratio would be more appropriate. Could you please explain?
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