Page 33 - CIMA May 18 - MCS Day 1 Suggested Solution

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 & 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.

Given that part of Menta’s strategy is to acquire complementary businesses that offer prospective
returns that exceed its WACC, accurate calculation of this is important for investment appraisal
decisions.
However, 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 2017, there was both an issue of
shares and a repayment of debt.
 The new investment does not have a different risk profile to the existing entity’s
investment projects. This could be the case if Menta invests only in bus passenger
transport.
 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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