The requirement here was to calculate the weighted average cost of capital (WACC) of a company. The cost of equity and the before-tax cost of debt were given in the question.

Some answers seemed to follow a learned routine for calculating WACC, without noting the information given by the question. This is the only reason I can offer to explain why some answers calculated the cost of equity, even though this was stated to be 10%.

In order to calculate the WACC, the market values of equity and the 8% bonds were needed. Most answers calculated correctly the market value of equity. Many answers then assumed that the market value of the bonds was $120 million, but this was in fact the nominal (par) value of the bonds in the statement of financial position.

The information needed to calculate the market value per bond was given in the question: interest rate, redemption value, maturity and cost of debt. Some answers calculated the market value using the after-tax interest payments, when the interest payments should have been before tax.

The after-tax cost of debt could be calculated by multiplying the before-tax cost of debt by one minus the tax rate, or by linear interpolation. Many answers used linear interpolation, but if the market value of the bonds had not been calculated, the interpolation calculation had no purpose.

Candidates should be aware that if a bond is trading at nominal value ($100) and is to be redeemed at nominal value ($100), then the interest rate is the same as the cost of debt. A linear interpolation calculation using these values to find the cost of debt simply goes round in a circle back to the interest rate.

While some answers ignored the bank loan, other answers correctly included it using the after-tax interest cost as its cost of debt, or explaining why it could be costed using the after-tax cost of debt of the 8% bonds.

A small number of answers added reserves to the market value of equity, but reserves are only of significance when using book values as weights.