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in a jun 13 question (AMH), we are asked to calculate the WACC. i had no issues in this – my answer was correct
we were given the equity shares, preference shares, loan notes and a bank loan.
in the eexaminer’s comments there is this line which i dont understand:“Alternatively (with explanation), the after tax cost of debt of the loan notes could have been used as the cost of debt of the bank loan”
can u please explain this?
i have reproduced the rates below:
shares:—12%
redeemable loan notes—4.8*
preference shares —-10%
bank loan —2.8%The reason is that the interest on the bank loan has been variable and just because it was 4% in the past does not mean that it will necessarily be 4% in the future (which is what we are interested in).
Although despite this, 4% is the most sensible rate to use for the future, it can be argued that the cost of the loan notes is more likely to represent the future cost of the loan (because they are both likely to be close to being risk free).
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