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cost of capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › cost of capital

  • This topic has 5 replies, 4 voices, and was last updated 1 year ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • March 4, 2021 at 3:24 pm #613328
    Jiya024
    Member
    • Topics: 168
    • Replies: 56
    • ☆☆☆

    sir how does a decreasing share price increase a company’s cost of capital?

    March 4, 2021 at 3:47 pm #613337
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51579
    • ☆☆☆☆☆

    It increases the cost of equity, which will not automatically increase the cost of capital (because the lower market value means higher gearing and the overall affect on the cost of capital could be for it to increase or decrease.

    You can see that it increases the cost of equity by looking at the growth model formula rearranged (we always use it as rearranged when calculating the cost of equity). Po is the denominator in the formula, and if this is lower then the result for the cost of equity will be higher.

    March 14, 2021 at 8:47 am #614382
    Kasey00
    Member
    • Topics: 0
    • Replies: 1
    • ☆

    what is the difference between realisable value and residual value in this type of question.

    March 14, 2021 at 11:20 am #614405
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51579
    • ☆☆☆☆☆

    In this type of question (i.e. calculations of the cost of capital) then neither realisable value or residual value are of any relevant at all.

    In calculations of NPV’s in an investment appraisal question then they are relevant and both mean the same thing.

    March 18, 2021 at 9:11 am #614663
    waqasiqbaal
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    Hi,

    I have 2 questions related to this topic, please.

    1. In example 7, while calculating IRR, why did we divide 6.06 by 18.28 and not 16.28?

    2. In WACC, when we multiple with Kd. that Kd (IRR) should not be (1 – T) right?

    Regards,
    Waqas

    March 18, 2021 at 2:41 pm #614687
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51579
    • ☆☆☆☆☆

    1. I assume that you mean example 8 and not example 7, in which case there is an error in the lecture (and I must re-record it). It should have been divided by 18.28 and not 16.28 but at least the printed answer in the lecture notes is correct 🙂

    2. With irredeemable debt, we cannot multiply Kd by (1-t). For the cost of debt we have to calculate the IRR of the after-tax flows.

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