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Hello John
hope you are well
i have 2 quick questions:
1) i am confused with cost of equity. cost of equity is the return that share holders want and cost of debt is the return that debt holders want. wacc however is the total return for the project. however if the company is all equity based then i would imagine that it has only got ungeared cost of equity and no wacc because it has no debt.
is that correct?
2) if a company has no debt then we would always use ungeared cost of equity to discount and never use wacc since there is no debt. is this true?
please help
thanks
hi john just want to clarify my above concerns
lets say if a company has got proxy company details and no betas are given in the question then I would imagine we have to use ungeared equity formula to get the business risk
once we have that then we will need to put our financial risk in this
but what if we are totally equity based company?
am I right in saying that in that case we will use ungeared cost of equity from proxy company to discount our projects?
lets say if we have debt and no betas are given then we will use wacc formula to calculate the total cost of capital for our projects?
1. WACC is not the return for the project – it is the cost of capital for the company.
However, it is correct that if a company is all equity financed then the WACC is equal to the cost of equity.2. We do use WACC, it is simply that if there is no debt then the WACC is equal to the cost of equity!!
If the company is all equity then you would use the ungeared cost of equity from the proxy company.
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