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Hi,I have a confusion regarding WACC,while calculating the cost of equity or debt we use dividends or interest payments,it is not mentioned whether those payments or cash flows are nominal or real,but it appears they are real as they(the interest payments)occur in annuity or perpetuities,but in an example in business valuation chapter,the WACC is assumed to be nominal and adjusted to become real for application of DCF valuation method,how come the WACC is nominal when we never inflated the components that constitute the WACC?
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When WACC is use , that means the company is both financed by Debt and Equity .. but if the funds is coming from one side (that is either debt or equity) we use separate cost of capital.
Example is a company project is been financed by debt .. the cost of capital we use is only Kd… not WACC … and vise versa…
Thank you derrick, but actually i meant to ask that the kd and ke we calculate,are they real required rate of returns or nominal required rate of returns?
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When the question is silent … it usually mean it is calculated on the market value bases … if the figure are given and you are ask to calculate but there is a general inflation …that mean the ke or kd or WAAC would have to be inflated from real to market…..
Market WAAC or ke or kd is the shareholder and companies priority …..
unless the question ask you for floor value or real value then you don’t inflate…..
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