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Hello Professor,
Hope that you can help me with the question regarding WACC.
WACC = (E /E+D) * ke + (D / E+D) * Kd (1-T)
This is the question regarding this portion of the above formula:
Kd (1-T)
In some of the questions in Exam Kit like question Q4 – Sleepon
The euro loan at 7.5% is used as a cost of debt and the formula looks like that:
7.5% (1-T) but
In some of the questions (1-T) bit is not applied at all.
Like in question Q17 – Morada
the cost of debt 4.4% is used when calculating WACC but cost of debt is not multiplied by (1-T)
Please can you help me understand when I multiple cost of debt by (1-T) and when I do not when calculating WACC.
Thank you very much
The cost of debt in Modara is multiplied by (1-T), it has been multiplied by 0.8 which is
(1-T)
When estimating the cost of equity and cost of capital for Morada before either proposal is implemented
Cost of debt = 3.8% (Risk free rate) + 0.9% (basic points) = 4.7%
4.7% is used in WACC not 4.7% (1-T)
This is not consistent for example with Exam Kit like question Q4 – Sleepon
Thanks
I do not know which answer you are looking at, but I am looking at the examiners answer.
The workings for the cost of capital are:
Cost of capital = (12·2% x $360m + 4·7% x 0·8 x $126·4m)/$486·4m = 10·0%
4.7% has been multiplied by 0.8, which is (1-t).