Weighted average cost of debt.

Hello Mr Moffat,

Sir i was going through past year questions, came across the Dec 2007, Q.5 and got confused on one part, to summarize the scenario,

The company had a current debt of 4% 400M, and they were planing to issue another debt of 6% 400M at par. Raising this additional debt would change the risk of the company and affect credit rating. It would result increasing the cost of the existing debt from 4% to 4.4%.

The question in the scenario was to calculate the increase in the company effective cost of debt capital.

What they did in the module answer is calculating the effective cost of debt by

(400/400+395.6 * 6%) + (395.6/400+395.6 * 4.4%) = 5.21% * 0.7 = 3.64%

(Market value of the existing debt after issue of the new debt is 395.6M
Tax is 30%)

My question is at the last part of calculation, they directly multiplied by net of tax, ( 5.21% * 0.7)its like assuming the debt is irredeemable debenture.
I remember in your lectures you said that calculating the cost of debt of redeemable debt we cannot just multiply direct from net of tax, its only irredeemable debenture that’s what we can do that. And also i thought that the individual cost of debt is already net of tax, so there was no need at the last part to net once again.

The question link is https://www.accaglobal.com/content/dam/acca/global/pdf/p4_2007_dec_q.pdf

The answer link is https://www.accaglobal.com/content/dam/acca/global/pdf/p4_2007_dec_a.pdf

I hope you understood my question
I appreciate for the time you took going through this whole question.

Thanks