Page 44 - 5.2 i. Manac Finance ITC Summarised Notes
P. 44
COST OF CAPITAL
WACC
• The weighting should be based on the target capital structure of
the company.
• Market values are only used where target capital structure is
not given – hence, we assume that the current D:E ratio based on
market values is a representative of the target if the target is not
given.
• You should only include long term (permanent sources of
capital) in your WACC calculation. Therefore you should only
include the bank overdraft if it is used as a source of permanent
capital (and not to finance working capital).
• Uses of WACC (nominal rate : includes the effect of inflation) include:
• Investment appraisal (Investments that yield a return higher than the cost of capital will create
shareholder wealth).
• Valuations ( to be covered for Test 2)
• EVA (Economic Value Added (to be covered under Performance Management in Costing)
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