Page 31 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

WACC
A weighted average cost of capital would be calculated by taking an average of the cost of debt
and the cost of equity, using the market values of the debt and equity finance as the relative
weightings.

As the cost of equity cannot be calculated from the available information, it is not possible to
calculate the WACC.

For awareness, it is only appropriate to use WACC when the following conditions are met:
▪ The capital structure is constant since, if this changes, the weightings in the WACC
calculation would also need to change. Note that, during the year ended 30 June 2018
there was an increase in the level of debt.
▪ The new investment does not have a different risk profile to the existing entity’s investment
projects. This may not necessarily be the case as, even investing in another entity in the
same industry, it may be subject to individual variations and differences from Grapple.
▪ The new investment is marginal to the entity. Any substantial new investment is likely to
result in a change to the WACC.

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