Res Income

[forumusernew]

Hi all,
Was hoping someone out there could help with below -
RI = EBIT(1-T) - Captial Charge…
When calculating capital charge do we use previous periods book value of equity and the preivious periods market value of debt?? Greatly appreciate any feedback, cheers…

 

[clangerh]

Just brushed up—you use the previous period’s BVs for each. But, more likely it seems the question will say something like:
Company xyz has total assets of, say, $4,000,000 and is funded with 60% debt or has a debt-to-total capital ratio of .60 rather than having you figure out the funding mix yourself.
Kind of off topic, but remember the cost of debt for the capital charge (%) is pre-tax.

 

[Harrogath]

If you got the beginning book value of equity, use that value.
If you got market value of the project, substract the market value of debt in order to get the book value of equity.
If you got book value of total assets, substract the book value of debt in order to get the book value of equity.

 

[Harrogath]

Great

 

[CFAhavemercy]

For the market value of Debt, does that include both LTD and Notes payable, or is it just LTD. I went through the books but CFA don’t specify what makes up market value of debt - they just say market value of debt - could be something they’ll try and trip us up on….. In particualar for the Enterprise Value formula………… Anyone know for sure????????