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sir
if we have multiple sources of debt finance(for eg. cost of bank loan, cost of ireedemable loans etc.), then while calculating wacc, shall we do all calculations in one line of wacc or do we first calculate a weighted avg. cost of debt and then a wacc??
(sorry cudn’t find a better way to explain.)
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Hi Jatin,
This is one of the “TEMPLATES” that I use when teaching WACC.
WACC states: Ko = Ke (%) + Kdat (%)
Approach / Procedure in the EXAM
Carefully examine the question to find out how many components of capital (Debt + Equity) there are within the overall CAPITAL STRUCTURE of the company.
Next, proceed to calculate the COST (after tax) of EACH component of capital separately and in ISOLATION.
As you do this, place each component of cost into the above “master” formula …. In this way, the “master” formula can be as long or as short as you like. All you have to do is to apply the appropriate “weighting” to that cost as you go along. For example,
Ko = Ke (%) + Kdat (%) + Kdat (%) + Kdat (%) …….
In calculating the cost of each component of capital you will need to SELECT or use one of the following MODELS or THEORIES, as required by the question.
Ke => you have 3 choices only in the F9 exam:
DVM (Growth or no Growth in Dividends)
P/E model
CAPMKdat => you have 2 choices only in the F9 exam:
Redeemable => IRR
NPV # 1
NPV # 2
InterpolateIRRedeemable => CI (1-t) / MV
Further possibilities => Bank Overdraft, Preference Capital, etc.,….
Weightings Preferably Market Values
Hope you like this.
Regards, Kevin Kelly
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