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The first step in determining FVW s WACC is to estimate the market value of its debt. It is generally safe to assume that the
The first step in determining FVWs WACC is to estimate the market value of its debt. It is generally safe to assume that the market value and book value of current debt are the same, since they should be paid off within a year. However, the market value of noncurrent debt can differ from its book value. FVWs noncurrent debt consists of a single privately placed bond issue with a total face total value of $ that pays a semiannual coupon of pa The bonds will mature in five years and their yieldtomaturity is pa with semiannual compounding.
Calculate the price of FVWs Bond.
Use this value to estimate the market value of the firms debt.
In order to estimate FVWs cost of debt, you need to calculate a weighted average of its cost of current debt and its cost of noncurrent debt. The cost of noncurrent debt is just the yield on the on the bond described above, so you need to figure out the cost of current debt. You begin by observing that FVW paid $ in interest in When you look at the balance sheet, you note that the only liabilities that charge interest are shortterm loans part of current liabilities and longterm debt part of noncurrent liabilities Since longterm debt is the abovementioned bond, if you subtract its annual coupon for from the total amount of interest paid during the year, you will obtain the amount of interest FVW paid on its shortterms loans. You decide to convert this amount into an interest rate and use it as the cost of current debt.
Estimate its overall cost of debt as a weighted average of the costs of its current and noncurrent debt.
TableF Fern Valley Wines Balance SheetAll amounts in $CashAccounts receivable,InventoryOther current assets,Total current assets,InventoryProperty plant and equipment,Rightofuse assets,Agricultural assets,Intangible assets,Deferred tax assets,Other noncurrent assets,Total noncurrent assets,Total assets,Accounts payable,Current tax liabilities,ProvisionsShortterm loans,Other current liabilities,Total current liabilities,Longterm debt,Deferred tax liabilities,Other noncurrent liabilities,Total noncurrent liabilities,Total liabilities,Contributed equity,Accumulated retained earnings,Total equity,
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