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WACC

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › WACC

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • June 2, 2019 at 9:56 pm #518448
    Anonymous
    Inactive
    • Topics: 2
    • Replies: 5
    • ☆

    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

    June 3, 2019 at 8:16 am #518494
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The cost of debt in Modara is multiplied by (1-T), it has been multiplied by 0.8 which is
    (1-T)

    June 3, 2019 at 8:06 pm #518639
    Anonymous
    Inactive
    • Topics: 2
    • Replies: 5
    • ☆

    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

    June 4, 2019 at 6:54 am #518723
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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).

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