Page 107 - Microsoft Word - 00 P1 IW Prelims.docx

The weighted average cost of capital (WACC)

More details on the 'risk free rate' – the spot yield curve

The risk free rate was given above as a single figure (usually based on the return
required on government bonds).

However, in reality the return required will usually be higher for longer dated
government bonds, to compensate investors for the additional uncertainty created by
the longer time period.

Therefore, you might be given a 'spot yield curve' for government bonds, instead of a
single 'risk free rate'.

To calculate the yield curve for an individual company's bonds, add the
given credit spread to the relevant government bond yield.

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