Page 13 - PowerPoint Presentation

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).

• The WACC is a nominal rate and therefore includes the
effects of inflation.

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