Jacana’s calculation is wrong since she mistaken the way of calculating cost of debt and using the wrong beta data. Differences between our calculation and Jacana’s We calculated cost of debt by calculating yield to maturity of publicly traded Nikkei debt, and Joanna calculated it by dividing the interest expense by the average balance of debt We calculated cost of equity by using the most recent beta data and Joanna calculated it by using the average beta data Cost of debt should be calculated by finding the yield to maturity on the company’s currently outstanding debt.
And the cost of debt is interest rate on new debt, not on already outstanding debt. So, in order to find out Nine’s cost of new capital, it would e more appropriate to calculate its yield to maturity on the company’s currently outstanding debt. In order to find out the future cost of equity, it would be more relevant to calculate it using the most recent beta data, which can better estimate the systematic risk. 4. If there is no market value data for the company, book values should be used to calculate WAC.
For example, market value of debt which is YET requires data of current prices of the company’s outstanding bonds and some company’s bonds have 5. In order to calculate expected future cost of capital, calculation of WAC usually sees market values of various components rather than book values. The market values of equity, debt should reflect the targeted capital structure, which may be different from the current capital structure.
So, if market value data is available, WAC should be calculated based on market value data. 6. Market value method should be used in this case to calculate Nine’s current cost of capital. Since there is no market value data of debt, we can only use book value of debt which is the combination of current portion of long term debt, notes payable and long term debt.
