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Hi,
I have a question concerning the calculation of WACC.
For example, we are given a balance sheet of a company and the equity includes Ordinary shares, RE, other reserves.
What will be included when we calculate WACC on book value and market value?
Thank youIf required to use book values (which is extremely unlikely because it is pretty meaningless) then the value of equity using in the weighting is total of share capital plus reserves (and retained earnings is a reserve).
However, unless specifically asked to use book values, we always calculate the WACC using market values (and the market value effectively includes the reserves so we do not add them on again).
I do explain all of this in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
(PS We stopped using the term Balance Sheet many years ago. It is now called the Statement of Financial Position, and this is what it will be called in the exam.)
Thank you so much. I did watch your free lectures but apparently I have forgotten this part since I watched it long times ago. I will watch the lectures again 🙂
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