# about that 40% debt Q

Can anybody help on the question of that 40% debt thing? it didn’t include 20,000 outflow for working capital. It’s 30,000*50% in the solution, which I don’t understand. why it’s not 50,000? cuz when we calculate WACC and IC, IC=net Fix capital + net short term operating assets = debt(excl A/P etc.) + equity in this q, he anyway needs to fund the whole project. why only need he worry about the fixed capital? where can he get the 20,000 for working capital?

Not only that but why is he funding 50% of the fixed capital with debt and not 40%?

the 50% is definitely an error…but unfortunately cfa website has no errat for this sorta stuff… whether or not the working capital was supposed to be included is still being debated on this forum…

did everyone agree that the 50K should have been used instead of 30? (sorry, cant find thread)

^^^ it should be financial capital only- 30 not 50, just checked

huh? i used 50 and got the same answer

for cross reference , check out Q14 in sample 2, they exclude WC inv

STD+LTD+equity, what so called financial capital, should be equal to operating capital (ie. net ST operating assets + net fixed capital) so… still can’t figure out why it’s 30,000. How could he start the project with only 30,000 in hand?

moreover, in EP calc. WACC\$ is found using total capital x wacc

> moreover, in EP calc. WACC\$ is found using total capital x wacc which q are you talking about?

The CFA solution says you take the \$50k * .5

is this from mock 2?

Here below is the the solution from CFAI: The accounting income is calculated considering the cost of interest (1/2 x 30,000 x 8.5% YTM on long-term debt = 1,275) as follows: Year 1: … Less interest expense (1,275) … Accounting income 10,635

it’s almost 3:00 my side. see you guys tmr…

sample 2 Q 14 answer, the 38 M they use below is initial capital outlay excluding WC INV, if we apply this rule to MOCK2 q30 we should use 30 not 50. I am just showing evidence that CFAI consistently applied this rule, I am not defending this from a conceptual point of view but rather saying we should probably use this rule if it comes up on the exam Correct answer = B Labor saving Less depreciation (0.50 × \$38 million) Less interest expense* Less fixed costs \$24,000,000 -19,000,000 -1,824,000 -500,000 Taxable income Less taxes (40%) \$2,676,000 -1,070,400 Net income \$1,605,600 *Interest expense assuming 40% debt financing = 0.40 x \$38 million x 12% = \$1,824,000

thanks viktorv I just found it in Sample 3. anyway, here it says initial project capital outlay. When I first saw the solution, I supposed it includes that 1mln NWC increase. I thought that 1mln NWC only helps on calculation of terminal year cash flow. But maybe you are right. It’s just too difficult for me to ignore the NWC in the real exam. or maybe the best way is to calculate two answers and check which one can be found in the options:)

Hey did anybody try to solve the Q30 of CFAI 2009 PM mock? I need to know the same thing that the OP back in 2008 is asking!

CPK you were there. What was the outcome of this errata? Do we really ignore the 20,000 WCInv and just apply the debt financing % on FCInv??