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John Moffat.
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teddyang
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Hello John,
Would you kindly clarify the cost of capital calculation, please? Why sometimes the CAPM is used but others the full WACC formula is used to calculate the cost of capital?
For example, I am going through the Kaplan exam kit. In the question of ‘Daron’ (Dec 95 Adapted), the cost of capital was calculated based on the WACC formula. However, in the question of ‘Tramont Co’ (Pilot 12), CAPM was used.
Thank you very much in advance.
John Moffat
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CAPM is used to calculate the cost of equity (assuming that we are given the beta in the question) and the cost of equity is then part of the calculation of the WACC.
Tramons asks for an APV approach and therefore we discount at the all equity cost of capital which is determined by the beta if all equity financed.
teddyang
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