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Good evening,
Could you please clarify if it is given non-tradeable debt among other debt and we are supposed to calculate WACC, should we include non-tradeable debt in calculation of WACC and if so what market value we should use for non-tradeable debt? I didn’t find any example like that.
Thanks in advance.You should include all long-term debt, including non-tradeable.
If it is not tradeable then you calculate the MV by discounting the future receipts at the investors required rate of return.
I show examples of this in my free lectures on the valuation of securities.
(The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
I tried to find the example about non-treadable debt, but couldn’t, if it is possible couldn’t you please explain which MV (if any) i should use in calculation of WACC in this example:
A firm has a fixed rate bank loan of $1 million. It is charged 11% pa. The corporation tax rate is 30%.
i would calculate cost of debt as 11%×0.7=7.7%, but how to calculate MV?
Many thanks in advance.Bank loans are certainly included in the WACC calculation. Since the amount of the loan is always the amount repaid (with no premium or anything) the market value is simply the amount of the loan which in your example is $1M, and the cost of debt is correct at 7.7%.
More commonly in the exam, if there is non traded debt, it will be non-traded debentures/bonds/loan stock, in which case the MV is the present value of the pre-tax flows discounted at the investors required rate of return, and the cost of the debt is the Internal Rate of Return of the after-tax flows to the company.
ok, many thanks, so if there is no any value of non-tradable debt in the test, then i assume that value is $100 and calculate WACC taking into account MV of non-tradeable debt is $100, am i right?
No – that it not what I wrote!!
What I wrote in the first paragraph applies only to bank loans.
For other non-traded debt, you certainly do not assume that the market value is $100. The market value is the present value of the future expected receipts (the interest at the coupon rate and the amount on redemption, discounted at the pre-tax cost of debt).
Again I work through examples of this in my free lectures on the valuation of securities.
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