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example 1 – answer : $2m/8%
A company has annual after-tax operating cash flows of $2m per year which are expected to continue in perpetuity. The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an after-tax weighted average cost of capital of 8% per year. Corporation tax is 20%.example 2 – calculation : used 4% but not 4%(1-25%)
Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.why some given the corporation tax but no need to use? isnt because the question is not asked under after-tax condition. like example 1 it stated after-tax so we need to use the after-tax. or in other way we use wacc instead of the cost
The key difference is whether the question specifies the use of after-tax figures or not. If it does, as in example 1, the after-tax WACC is used. It clearly states the after-tax weighted average cost of capital (WACC) so it is explicitly given :0-)
If it does not, as in example 2, the before-tax figures are used directly.
The before-tax cost of debt is given as 4%, and the company pays a corporation tax of 25%. However, the question does not specify that the cost of debt should be adjusted for tax, which is why the before-tax cost of debt is used directly :0-)but in section C question, i did faced that the question did not ask for after-tax but the cost of debt need to be kd(1-t). and the final calculation is to find out wacc but not mentioned is after-tax. so does it mean in section C, whenever we faced calculation of wacc every calculation must take in the tax? or calculation of wacc is needed to take in tax in every section?
In calculating the WACC, it is standard practice to use the after-tax cost of debt. This is because the company benefits from tax relief on the interest payments. Therefore, unless a question specifically states to ignore tax or does not provide any information about tax, you should always include the tax effect in your calculations. This applies to all sections, in the exam including Section C.
other than this question, would u like to explain to me about the interim and exchange rate here are some examples
example : interim dividend
Geed Co paid an interim dividend of $0.06 per ordinary share on 31 OCT 20×6 and declared a final dividend of $0.08 on 31 DEC 20×6. the ordinary share in Geed Co are trading at a cum-div price of $1.83.dividend yield = [(0.06+0.08)/(1.83-0.08)]
my question here is what if the interim dividend is paid under preference share but not ordinary share. do we still need to add into the calculation. or they add back into their own category
example : exchange rate
peso : $
Spot exchange rate 5.467 – 5.498
Six-month forward rate 5.521- 5.545in section B question, normally will be given (Spot exchange rate) and (Six-month forward rate). how to identify which to in a questions
You can’t just keep asking questions following on
These are new and different questions
Can you please ask them separately in futureSo if the interim dividend is paid under preference shares and not ordinary shares, it would not be included in the calculation for ordinary shares. The dividend yield for preference shares would be calculated separately, taking into account any dividends paid specifically for preference shares.
You use the spot for money market hedge
And the forward rate for forward contractsIt depends on whether you are buying or selling
Buy High
Sell lowok, thanks for the reply and sorry for that. i did ask separately but no one answering.
so for the dividend yield for ordinary shares only take in interim ordinary dividend and final dividend, so as the preference shares. they do not take in others interim into their account, do i understand it correctly.
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