When (and when not!) to use the WACC for Investment appraisal – ACCA Financial Management (FM)
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Sir when you said @ the same ratio you mean borrowing additional finance both from equity and finance in a way that the return required is the same as the current (assummption)
No. It means that if at the moment the equity is (say) twice as much as the debt borrowing, that any future finance raised is raised in the same ratio (i.e. twice as much from equity as from debt). The effect of this will be to keep the cost of equity and the cost of debt the same as they were before, and therefore to keep the WACC the same as before.
Hi John,
I have gotten a list of WACC assumptions from BPP notes. one of the assumptions is cost of capital reflects marginal cost. could please explain what does this mean?
Thanks in advance.
That the cost of extra (i.e. marginal) finance will equal the WACC. This is what we assume as I explain in the lectures.
In the notes, it is mentioned that if we raise all from equity, the risk for shareholders will increase, while in lecture, you said the risk would decrease. Which is the correct one?
The notes say “higher gearing will increase the level of risk for shareholders” which is the same as I say in the lecture.
Sir when we decide to equity finance our company. the gearing decrease because we now have more capital emoplyed? (debt/capitalemployed) is this correct?
sir you mentioned the cost relates to gaining new finance. If we are planning to get new finance from debt do we still need to wacc( the equity) why not just use the debt cost of capital?
Dear John sir ,
Can u please suggest us the theory to read for f9 as u said that 50% is practical and 50% is theory …..so can u please tell us what all theory is important to read and most likely to come in exam
All the theory needed is covered in my free lectures and lecture notes, and all of it is important.