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Business valuation
Deriving a suitable cost of capital for
discounting
6.1 Risk adjusted cost of capital
When using a proxy cost of capital, care must be taken to ensure that it
reflects the business risk and the capital structure of the entity being
valued.
If necessary, a risk adjusted cost of capital could be used.
6.2 Modigliani and Miller's (M & M's) equations
Modigliani and Miller's (M & M's) equations can be used to adjust an
entity's cost of equity or WACC to reflect a different capital structure.
Cost of equity: k eg = k eu + (k eu – k d)[V D(1–t)/V E)]
WACC: WACC = k eu [1–V D t/(V D + V E)]
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