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When to use which WACC formula? I always get confused with the question.
1) Sometimes it will use asset beta or equity beta to find the cost of equity, how I know when should I use asset beta or equity beta?
2) When should I use [Ke*MV of equity/(MV of equity+ MV of debt)]+[Kd(1-t)*MV of debt/(MV of equity+ MV of debt)]?
3) When should I use Ke*MV of equity+ Kd(1-t)(MV of debt)?Is that (3) will be used when capital structure will remained unchanged after merger? And use (2) when ques remain silent or say that capital structure will chg?
1. It is always the equity beta that determines the cost of equity. (If there is no gearing then of course the equity beta is equal to the asset beta.)
2. That is the normal formula for the WACC (although strictly the last term is only correct if the debt is irredeemable, for redeemable debt the last term should be replaced by the IRR of the after-tax flows).
3. We don’t use that formula!
All of the above is explained in my free lectures.
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