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sir in the chapter cost of capital we can calculate cost of equity(dvm,capm) and cost of debt and then calculate wacc
i have a doubt regarding whether the cost of capital calculated with above methods are nominal cost of capital or real cost of capitalYou don’t need to know this really
But in answer to your question:
The formula above for calculating Cost of Capital – WACC does not incorporate any inflation or any concept of time value of money. Therefore, the Cost of Capital that is derived using this formula is referred to as Nominal Cost of Capital.
It does not factor inflation, or time value of money.The relation between Real and Nominal Cost of Capital is mostly undertaken using the Fisher Formula.
(1 + i) = (1 + r) (1 + h)
Where r is the Real Cost of Capital, i is the Nominal Cost of Capital and h is the general inflation rate.
Using this formula, the conversion from Nominal Cost of Capital to Real Cost of Capital (or vice versa) can be easily made.SIR WANTED TO KNOW FOR QUESTIONS LIKE:
IF THE INVESTMENT APPRAISAL INCLUDES INFLATION AND WE ARE GIVEN WITH WACC, WE DO NOT NEED TO USE FISHER FORMULA I.E. WE CAN DIRECTLY USE WACC RIGHT?
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