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Hello!
1. Is the cost of capital given in the investment appraisal question in section C considered to be weighted average cost of capital? If they give us the cost of debt and equity separately in the exam, should we find the weighted average cost of capital and discount the cash flows by WACC?
2. If the rate of return is not specified, is it assumed to be post tax cost of borrowing? Should we always use the post tax cost of borrowing to discount the cash flows?
1. Yes. The discounting is always at the WACC in Paper FM.
2. We always use the post-tax cost of borrowing together with the cost of equity in order to calculate the WACC. The cost of equity is the same as the shareholders required rate of return and tax is irrelevant. The cost of debt is not the same as the investors required rate of return on debt – the investors required rate of return is pre-tax and the cost to the company is after tax.
All of this is explained in detail in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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