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Hello Mr Moffat
My question is about December 2008-Q2- Part a.
Calculating the current WACC.1- Why we don’t use $800M as the market value of the debt ? (It has used $827.17M).
2 -Also for calculating the market value of the shares, why we don’t use the the free cash flow model to calculate the market value of the equity ? (the market value of the equity is $6,894M with free cash flow model)
Thank you in advance
Hello MR Moffat
I have another question about part a. Calculating the cost of debts.The answer says cost of debt is : 4.65 – 25% = %3.4875.
But I think it should be :
(5.6 + 45 points) – 25% = %4.5375because in the part b, when we want to calculate the cost of debt it has done the similar approach . Ie,:
(1.8% + 50 points)/2 + (4.6% + 85 points)/2 = %3.875 and so cost of debt is : %3.875 – 25% = 2.9062%.Why there is inconsistency between the way of calculation of cost of debt in part a and b ?
Kind Regards
1. $800M is the nominal value of the debt. We always use market values when calculating the WACC. Since we know the coupon rate and the investors required return, we are able to calculate the market value.
2. We don’t need to calculate the market value of the shares for part (a), because it is given in the question!
3. 5.6% is the coupon rate (the interest on nominal) which is not the same as the current investors required rate of return. Since the average time to maturity is 4 years, the current required rate of return is 4.2% + 0.45% (and the cost to them company being 75% of this because of tax relief).
Part (b) had calculated the new cost of debt in exactly the same way.
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