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With market value WACC, the costs of equity and debt are weighted by the total market values of equity and debt.
With book value WACC, the costs of equity and debt are weighted by the book values (i.e. the total values in the Statement of financial position).
We always use the total market values, unless the question specifically asks for book values to be used (which has happened once). Book values are not ‘true’ values, which is why we should use market values.
Yes it was in the dec 14 exam
All the calculations will be the same for the cost? Its just an additional working for that WACC table in the last?Yes – the costs of equity and costs of debt are calculated in the normal way. It is only the weightings that are different.
(Incidentally there are lectures on here of me working through all of the questions in the December 2014 exam, which might help you:
https://opentuition.com/acca/fm/acca-fm-revision-lectures/ )Is the rate calculated by wacc the same as the nominal rate? I’m asking because I was wondering why the nominal rate isn’t calculate using (1+n)=(1+i) (1+r) in the dec 2009 question ASOP, where the WACC is given as 11%.
When we calculate the WACC in the normal way, it is the actual cost of capital (which is the nominal cost of capital).
Is it that if we take book value of equity we include reserves as well whereas we dont do that for market value.
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