Page 27 - FINAL CFA I SLIDES JUNE 2019 DAY 10
P. 27
Session Unit 10:
36. Cost of Capital
LOS 36.e: Explain the marginal cost of capital’s role in determining the net present value of a project., p.45
The WACC is the appropriate discount rate to estimate NPV of projects:
Subject to:
• Project having same risk as the business (if not, go for risk adjusted WACC);
• Capital structure remains constant/at target structure over the life of the project.
If NPV = +ve, based on this WACC, Accept project!
tanties
LOS 36.f: Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-
rating approach., p.45
Note: Cost of debt is the market interest rate (YTM) on new (marginal) debt, NOT the coupon rate on the firm’s
existing debt. If both are given in the exam, use YTM (market rate). If market value not available, use matric
pricing: use yield curve based on credit rating and average maturity of the debt!
