• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

WACC calculation

M

Mitsukoshi

Member
Hi,

When using WACC to determine discount rate for new project, what is the market value of debt and market value of equity in the calculation?

Is (market value of debt+ market value of equity) = the capital we need to raise for a new project?

It is mentioned this is based on company's optimum structure , how does this relate to the calculation?

Thanks
 
Hi Mitsukoshi

The market value of debt and equity is the amount of debt and equity capital that is in the business, rather than required for a particular project. So, the MV of equity would be the number of shares x the market price of each share.

This means that (MV debt + MV equity) = total capital in the business.

The optimal capital structure is an idea that was introduced in CT2 (Chapter 15 is all about the cost of capital). As a business increases the level of debt, initially it will reduce the WACC as they take advantage of the lower cost of debt and tax relief on debt finance. As the amount of debt finance increases, both equity and debt holders will require a higher rate of return. There is a point at which the cost of increasing debt finance begins to outweigh the benefits and the WACC increases. This point represents the optimal capital structure referred to the course notes.

Hope this helps :)

Thanks
Sarah
 
You must log in or register to reply here.
Back
Top