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Sir,
Using CAPM for calculating cost of equity, I thought the answer is 4%+1.15(6-4%), the examiners answer shows 4%+1.15(6%).
Please explain. Thank you sir
If 6% was the market return then you would be correct.
However 6% is the premium (i.e. the excess of the market return over the risk free return).
You might find useful my lectures working through the whole of the December 2014 exam – they are linked from the main F9 page.
In respect of the same question why are reserves included in the wacc calculation of book values?
Thanks
Because the amount owed to shareholders (using values from the Statement of financial position (i.e. book values)) is the share capital plus reserves!
When using market values we do not add the reserves because the are effectively already included in the market value – the most obvious reason for the market value being higher than the nominal value is because the business has been making profits (and therefore has reserves).
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