Page 32 - FINAL CFA SLIDES DECEMBER 2018 DAY 11
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Session Unit 10:
36. Cost of Capital
LOS 36.e: Explain the marginal cost of capital’s role in determining the net present value of a project., p.45
The WACC is the appropriate discount rate to estimate NPV of projects:
Subject to:
• Project having same risk as the business (adjust upwards or downwards to allow for risk –risk
adjusted WACC);
• Capital structure of the firm will remain at the target capital structure over the life of the project.
tanties
Projects for which the present value of the after-tax cash inflows is greater than the present value
of the after-tax cash outflows should be undertaken by the firm.
LOS 36.f: Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-
rating approach., p.45
Note: Cost of debt is the market interest rate (YTM) on new (marginal) debt, NOT the coupon rate on the firm’s
existing debt. If both are given in the exam, use YTM (market rate). If market value not available, use matric
pricing: use yield curve based on credit rating and average maturity of the debt!
