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Regarding wacc

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Regarding wacc

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • July 5, 2022 at 4:33 am #659970
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Sir if we were considering raising finance from debt only. say the cost was 6% this is the first time were going raise debt and cost of equity was 20%. would we discount it at 6% or would we need to calculate wacc( just wanted to emphasize we are not raising any amount from equity) is wacc applicable only we are raising finance from part debt and equtiy?

    In the lecture video for effects of gearing you used the whole 20% even when the finance was raised through debt. why do we use the whole why not consider just the marginal effect?

    July 5, 2022 at 9:06 am #659980
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54759
    • ☆☆☆☆☆

    We still will discount at the WACC.

    Although they may be raising the money from debt which is only costing 6%, the increase in the gearing will mean that equity will be requiring a higher return than they currently do. So the overall cost to the company will be higher and we assume (for reasons that I explain in my lectures) that the overall cost will still be the WACC.

    July 5, 2022 at 10:58 am #659990
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    sir should we not just consider the marginal extra cost. example the share holder would want 3% extra so should we just not consider the 3% extra?
    If at the beginning they raised equity and the share holders required 20%that would be the cost but is now they raise debt @6% why do we take the whole 20% and not the extra cost that arised from taking in debt?

    July 5, 2022 at 3:39 pm #660011
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54759
    • ☆☆☆☆☆

    Please watch the later lectures where all of this is explained – you cannot expect me to type out the future lectures again here 🙂

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Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Regarding wacc’ is closed to new replies.

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