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Chapter 6

The weighted average cost of capital

(WACC)

Outcome

By the end of this session you should be able to:

 calculate the cost of capital of an organisation, including the cost of equity and
cost of debt, based on the range of equity and debt sources of finance,

 discuss the appropriateness of using the cost of capital to establish project and
organisational value,

 assess an organisation’s debt exposure to interest rate changes using the
simple Macaulay duration and modified duration methods,

 discuss the benefits and limitations of duration, including the impact of
convexity,

 assess the organisation’s exposure to credit risk, including:

(i) explain the role of, and the risk assessment models used by the principal
rating agencies,

(ii) estimate the likely credit spread over risk-free,

(iii) estimate the organisation’s current cost of debt capital using the
appropriate term structure of interest rates and the credit spread,

and answer questions relating to these areas.

The underpinning detail for this chapter in your Integrated Workbook can
be found in Chapter 6 of your Study Text

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