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Could you be asked in a question to compare WACC and CAPM?
i.e. advantages/limitations compared.
If yes, what would you write?WACC and CAPM are completely different things – you could not possibly be asked to compare them!!
(CAPM is a way of calculating the cost of equity, which we then use in the WACC calculation)
Im only asking because of the following:
It has confused me terribly…
The article is not really particularly good (it was not the examiner who wrote it), but it is not disagreeing at all with what I wrote before.
CAPM is not an alternative to WACC. If we are not changing the gearing of the company then we appraise at the WACC (and CAPM can be used to calculate the cost of equity to be used in the calculation).
If we are changing the gearing, then we need to calculate a WACC for the project, which means calculating a relevant cost of equity (the project specific cost of equity), again using CAPM to get the cost of equity. (However if they are changing the gearing then also the examiner can expect you to be able to calculate the project specific cost of equity, he will not ask you to then continue and calculate a WACC for the project – that comes in P4).All of this is dealt with in my free lecture notes and the lectures that go with them.
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