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Can you please explain what is Average Cost of Capital and what is Marginal Cost of Capital. Is there any difference that we should know for paper F9?
Secondly, the WACC that we calculate (or given in the exam) is average cost of capital that means it can be higher or lower in real life?
Thanks
The average cost of capital is the WACC (although we do not normally refer to it as the average cost of capital).
The marginal cost of capital is the cost of extra finance raised, but you are not asked to calculate this in Paper FM (it is no longer called F9).I do not understand your last sentence – the average cost of capital is the WACC. As to how it might change is explained in my free lectures on the theories of gearing.
What I meant was in my second question that WACC that we calculate in the exam will be the same or exact in real life or it might be higher or lower in real life?
Like actually WACC is calculated as 10% but in real life, it would be exact 10% or it can be 11% or 12% which will increase the cost of the company. What do you say!?
In real life it depends on how accurate the estimates used for the cost of equity (i.e. the expected future dividends, or the estimate of the equity beta) are.
However in real life it is impossible to be certain and the same calculations would be used as in the exam.
It is not an ‘average cost of capital’ which is why (as I wrote) it is not referred to that in the exam.
Have you actually watched all of my free lectures on the calculations of the cost of capital and on the affect of gearing on the cost of capital?
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