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December 5, 2015 at 12:06 pm
When calculating the WACC why do we mutliply equity/total with the cost of equity and debt/total with the cost of debt. I think this might just be purely mathematical and not related to financial management as it just involves calculating a weighted average but I am just a little confused.
John Moffat says
December 5, 2015 at 1:13 pm
Why are you confused? We need to know the overall cost of capital – some comes from equity and some comes from debt and therefore we calculate the average.
As I say in the lecture, the reasoning for using the WACC (and when not to use the WACC) is covered in the subsequent lectures.
Ashley R says
June 4, 2015 at 11:51 am
HAHAH!!Best Part….The examiner himself ignores the formula :p ….he is jst St.. you never ever evr….THANKS JOHN….!!!your lectures are the best ^__^
June 4, 2015 at 12:03 pm
Thank you 🙂
June 3, 2015 at 6:29 pm
Urgent Help !! You have said that in irredeemable we only take account of tax but not in redeemable debts but in Example 10 in cost of debt calculation. Year 1-6 Int (10 * 0.70) = 7p.a ?? Why have you used tax as it’s redeemable debt.
In last lecture example 8 with redeemable debt you didn’t take into account tax
1-5 int 6pa .
Why is is different ??
June 3, 2015 at 6:31 pm
In notes example 8 & 10 they have taken into account of tax in case of redeemable debt???
June 3, 2015 at 6:41 pm
You have misunderstood – we always take account of tax whether it is redeemable or irredeemable, if we are calculating the cost of debt to the company.
If we are looking at the return to investors, then we ignore tax (whether redeemable or irredeemable) because company tax does not affect them.
What I said was that it it is irredeemable, then the cost to the company is the return to investors multiplied by (1 -t).
If it is redeemable then that does not work, and to get the cost to the company we have to calculate the IRR of the flows using the after-tax interest (but the repayment at the end is not tax allowable).
June 3, 2015 at 7:15 pm
I really appreciate your prompt response. Now I have fully understood . Many many thanks Sir !!!!
April 20, 2015 at 11:28 am
Thanks so much John!!!
April 20, 2015 at 11:14 am
halo sir,for chapter 17,example 10, where do we get the 32M and 6.3M when calculating the WACC.
April 20, 2015 at 11:21 am
They are the market values of equity (10M shares x $3.20) and of debt ($6M x 105/100)
April 20, 2015 at 9:09 am
Thanks John for this good work.
Now I have got a problem,could you kindly explain to me the differences between these words because im totally lost; ex int, ex div, cum div and cum int.
I totally get lost when you start talking about these words.
April 20, 2015 at 9:28 am
ex int and ex div are the market values of debt and of equity assuming that interest and dividends have just been paid.
cum int and cum div are the market values assuming that interest and dividend are about to be paid.
The cum values are the ex values plus the interest or dividend about to be paid.
In the exam, values are always ex div and ex int unless told differently.
April 6, 2015 at 7:55 pm
I have one question suppose a company XYZ Ltd has cost of debt & preference shares @ 8% and equity shares of face value Rs 10 each which will be issued at a premium of Rs 10 each and also the Co. is having a requirement to raise Rs 200,000, the expected EBIT of the Co. is Rs80,000.The tax rate is 50%; what will be the Co’s EPS, the financial break level and indifference level of EBIT.
April 7, 2015 at 1:00 am
You must ask this in the F9 Ask the Tutor Forum, not as a comment on a lecture. (although neither ‘financial break level’ nor ‘indifference level’ can be asked in Paper F9.
March 29, 2015 at 9:00 pm
I have a different kind of question.can you just please help me to solve the following question.
Assume that ABC Corporation has the following capital structure. 30% debt, 10% preferred stock, & 60% equity. ABC Corporation wishes to maintain these proportions as it raises new funds.it’s before tax cost of debt is 8%, it’s cost of preferred stock is 10%, & it’s cost of equity is 15%. if the company’s marginal tax rate is 40%. what is ABC’s WACC?
March 29, 2015 at 9:21 pm
The cost of debt is 8% x (1-0.4) = 4.8%
The cost of preference shares is 10%
The cost of equity if 15%
To get the WACC you multiply each cost by the proportions (30%; 10% and 60%) and add them up.
I do suggest that you watch the free lectures on WACC.
March 27, 2015 at 3:15 pm
hi! sir could please explain here the concept of perpetuity..i was trying to attept a question relating cost of capital and i could not find the correct answer.here is the qustion:
Q: Z has 10,000 shares in issue, dividends for the next five years are expected to be
constant at 10 cents per share and then grow at 5% per year to perpetuity; cost of
equity 15%. CALCULATE MARKET VALUE?
March 27, 2015 at 3:32 pm
Perpetuity means for ever.
I assume that you have watched the free lecture on the valuation of securities. In which case you will know that the market value of a share is the present value of the future expected dividends.
In this question, you can calculate the present value of the first 5 years of dividends by discounting the 10c a share using the annuity factor for 5 years at 15%.
Once you get to the perpetuity (which is from year 6 to infinity) you use the first formula on the formula sheet. However, this formula gives the present value now assuming that the first dividend is in 1 years time. In this question the perpetuity starts 5 years late (it starts at time 6 instead of time 1) and therefore you have to discount the result from the formula for 5 years at 15% to get the present value.
Finally, if you add the result of the previous paragraph to the result from the paragraph before, you will have the market value of the share – the present value of all the future dividends.
(If you have not watched the lecture on the valuation of securities then do, because this question in itself has nothing to do with the WACC, which is what the lecture above is about.)
March 27, 2015 at 3:47 pm
That i’ll do.thank you so much! i got the answer.
March 25, 2015 at 2:41 pm
hello sir,please i need a little clarification on the tax rate for redeemable and irredeemable debt. from my own understanding(i might be wrong) we are still deducting tax of 30%. my question is how do we save on tax with irredeemable debt and not save tax on redeembale but yet we still deduct 30%..i think i am confused and have it all mixed up.
As usual thanks for the great lectures.
March 25, 2015 at 2:57 pm
We save tax on both redeemable and irredeemable. However in both cases we only save tax on the interest payments. With redeemable debt there is also the repayment, but we do not save tax on the repayment – only on the interest each year.
March 25, 2015 at 4:06 pm
thank you sir for the swift response and its clearer now,
November 12, 2014 at 6:27 pm
Hello Sir, Just wanna ask one thing while calculating cost of debt, you have assumed the interest to be 7 p.a. shouldn’t it be 10? because in example 8, while calculating the same thing you have ignored tax. I’m abit confused where we should ignore tax and where we should consider it. Waiting for your answer.
Thanking you in anticipation.
November 12, 2014 at 6:41 pm
I think you must have skipped through the lecture too quickly (or else you have not downloaded the course notes, which makes the lecture impossible!).
When we are calculating the return to the investor then tax is not relevant – they investor receives the full interest.
When we are calculating the cost to the company then tax is relevant – the company gets tax relief on the interest which makes the net cost lower.
I assume that you have downloaded the Course Notes (otherwise it is pointless watching the lectures 🙂 ) in which case you will see that the requirements for both examples are (a) calculate the return to investors, and (b) calculate the cost of debt to the company.
I have done the same thing in both examples.
June 21, 2014 at 7:35 pm
Yeah John! I remember waac formulae was at 2 places in investment appraisal questions. 1 was just easy formuale, the other time it was added with capm( project-specific cost)…!
June 22, 2014 at 10:23 am
Not quite. There is only one way of calculating the WACC.
The calculation of the cost of equity can be in two ways – using the dividend growth model or using the capital asset pricing model (depending on the information given) – both are covered in our Course Notes and lectures.
November 10, 2013 at 5:53 am
thank you so much
October 21, 2013 at 7:05 pm
Thanks so much John you are a gem
October 18, 2013 at 5:06 am
example 10 on wacc- how is Debt market value worked out to be 6.3? sorry
October 18, 2013 at 7:31 pm
The nominal value of the debentures is $6M.
The market value is 105 (which means $105 for every $100 nominal).
So the total market value is $6M x 105/100 = $6.3M
September 12, 2013 at 7:29 pm
In example 10 of chapter 17 of OT notes – IRR= 5%+12.59/25.06*5%
I’m bit confused because we first discounted at10% and then we guessed d.f @ 5% because of negative NPV at 10%, comparing this against example 8 shouldn’t IRR be 10%+12.59/25.06*5%
I’m not sure why you’ve used 5% instead of 10%. Please explain
Looking forward to your reply.
September 12, 2013 at 8:08 pm
Apologies, it’s quite straight forward, I understand it perfectly now.
M Fauzi says
August 19, 2013 at 6:29 am
Dear Sir John Moffart,
You just make things so simple that i now have confidence in mastering this subject. I like it when, in your humour, you pick on Peter, Valentino, Andrea and ‘Hello, Hello’ for lagging in their attention (smiling…) Your lectures are just soooo joyful and beneficial to hear and watch.
You are indeed a gem and a great asset to producing future generations of capable accountants!
Please continue with your antics and style of lecturing. They are very effective and I just love them…..
August 18, 2013 at 7:40 pm
What you have done on WACC is to demystify a dreaded masquerade.
OT is the best! I am not only confident that I will pass F9, but will make a good grade.
Thanks a lot.
May 13, 2013 at 7:56 pm
5% Preference shares ($1 nominal value) 10
the ex-dividend market value of the preference
shares is $6·25 million
what will be the cost of preference shares ????????
May 13, 2013 at 6:49 pm
can we use overdraft in wacc ?
e.g 5% overdraft is given in question ?
May 13, 2013 at 9:14 pm
It depends whether or not the overdraft is intended to be long term.
If not long term then it should not be included.
If it is intended to be long term then it should be included (remembering that the cost is the interest less tax relief).
Usually the examiner makes it clear as to whether or not it is intended to be long term. If he does not make it clear then he accepts it included or not included (even though the WACC may be different). Just check as to whether or not he make it clear, and if he does not then state your assumption.
Tharua ( ਠਰੂਆ ) says
November 28, 2012 at 4:40 pm
thanks ,, its priceless .
November 15, 2012 at 6:00 am
Dear John, ur GENIUS! THX LOAAAADDZZZZ
November 5, 2012 at 2:30 pm
Honestly, what is it with tutors on opentuition (John Moffat especially) that once they handle topics on ACCA, cloudy areas just become clear and dreaded subject areas become a piece of cake? They just ace it when they explain topics… Really, other tutors (who think they know stuff but don’t) should learn from these great OT tutors…they’re simply awesome! Common guys we need to canvass for an award for ’em..Not being patronising, just truly grateful 🙂
November 5, 2012 at 8:52 am
October 5, 2012 at 3:36 am
I WAS SO SCARED OF WACC UNTIL I SAW MR MOFFATS EXPLATION ..THANK YOU SIR
June 6, 2012 at 10:27 am
Thank you so much. I used to be scared when I see questions on WACC. It is actually so straight forward and interesting!
April 22, 2012 at 8:16 pm
Strange, but the lecture stopped after example 9.( just 5 minutes)
Could you pls see if something is wrong?
April 19, 2012 at 11:00 pm
Thank you for letting us know about the WACC formula. your working makes it very easy now.
April 18, 2012 at 9:15 am
wow fantastic thank you
April 12, 2012 at 8:23 pm
Hi, the lectures are very good. But on this example i am having problems understanding two calculations.
Can someone please explain why the interest on the cost of Debt calculation is (10×0.7)?. I thought that since there are 10% debentures it should have been (10×0.10)?
Also, on the WACC calculation the MV of Debt is 6.3M, why?
April 13, 2012 at 7:32 am
@superacca, The interest on 100 nominal is 10 per year, but it is tax allowable at 30% and so the after tax cost to the company is only 70% x 10 = 7 per year.
The question says that the debentures are quoted at 105 (which means 105 per 100 nominal). So given there are $6M nominal, the market value is $6 x 105/100 = $6.3M
April 13, 2012 at 8:38 pm
Thank you for the explanation. It makes sense now and was also computed on previous examples, my bad i missed it…..You are a great lecturer and to be honest, its the first time i enjoy watching acca lectures. You also made me laugh at some videos with your comments 🙂
Thank you soooo much, i will definately pass with your help!
September 8, 2013 at 4:16 pm
So relieved someone has asked this. I have been wrecking my brain trying to figure out where $6.3m came from. Pheew!! Makes sense. Thank you.
April 12, 2012 at 3:14 am
Very nice lecture, real eye opener!!
March 22, 2012 at 9:51 pm
keep up the good work, well explained, with these lectures and my hard work i dont see myself failing, sereously…!!!
March 14, 2012 at 5:15 am
What is the difference between the WACC and the return on assets?
August 10, 2012 at 11:20 am
@cammielot, The WACC is the overall cost of the finance used in the company.
The return on assets is an accounting measure and is the profit as a percentage of the total capital (usually at balance sheet value).
March 4, 2012 at 9:57 pm
Nicely explained, thank you, I like the way he makes complicated things easy.
February 25, 2012 at 8:49 pm
An excellent lecture.This lecture explains maybe why some students fail the f9 examination.Because if one relies on the formula used for calculating the WACC and the question deals with redeemable debt one will fail that part of the question and this means losing valuable marks
December 7, 2011 at 8:53 am
John Moffat hats off to u… U R A GRT8 TEACHER MAY GOD BLESS U……
Saad Bin Aziz says
November 22, 2011 at 9:50 am
ALL F9 LECTURES ARE TERRIFIC! THANK YOU OPEN TUITION OR SHOULD I SAY “SHUKRIYA” AS WE SAY IT IN URDU LANGUAGE:-)
November 19, 2011 at 11:59 am
i strongly agree
November 4, 2011 at 8:17 pm
These lectures are just so priceless…..!!!
He just makes everything so easy to understand….
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