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Dear Sir,
Presumably, I should not pay much attention for this preparatory question, but there are couple of confusing moments:
1) why the BPP answer ignores the new debt to be issued in Swiss Francs (260 mln)? The cost of capital for the new project probably should be based on a capital structure which includes the new debt?
We even have the spot rate for such an excercise!2) We are told that existing loans have cost of debt 3% – we’re not told whether it’s post-tax or before-tax. Given the size of the figure, which is only 3%, it looks like it”s post-tax 🙂 In such circumstances, we should write that we assumme that it’s post-tax?
3) thus, CFs and discount rates are assummed as nominal in P4, unless it’s stated otherwise. Do we have relevant assumptions for kd (I.e. post-tax unless stated otherwise)?
Thank you in advance.
I think maybe BPP has amended the question again since the version I have of their answer.
The reason I say that is because there is no mention of the existing loans having a cost of 3% (part of the workings is to calculate the cost of the existing loans). However, in general terms, the cost of debt is always post-tax (unless it specifically says a pre-tax cost of debt (which strictly speaking would be meaningless but still).
With regard to the Swiss loan, in the version of the question/answer that I have, we are not told the cost of debt for the loan and therefore are forced to assume it will have the same cost as the existing 5 year loans. Since also, the question says that the gearing will not change, it therefore becomes unecessary to bring it in (for part(a) of the question).
You’ve written that “we’re forced to assumme”. Is it widespread in P4 exam?
It seems a good point for exam techiques:
If candidate is stuck, he/she should suppose that he/she is “forced to assumme” by the examiner intentionally. This helps to keep calm and carry on. 🙂
Greate, really greate.
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