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Divisional performance appraisal and transfer pricing

(W2) Adjustments to capital employed

$
Capital employed at beginning of year X
(as per RI calculation)
Adjust to reflect replacement cost of assets X/(X)
(i.e. net book value)
Adjust to reflect economic and not accounting depreciation X/(X)
(i.e. reflects true figure)
Add back value of provisions in the year X
(non-cash)
Add back non-cash expenses in the previous year X
(add to retained profit at end of year)
Add NBV of advertising, R&D and employee training at end of
previous year X
Add NBV of operating leases at end of previous year X
–––––
Adjusted value of capital employed at beginning of year X
–––––

Only a small number of the adjustments in (W1) and (W2) are examined
in a typical exam question.

(W3) WACC

WACC = (proportion of equity × cost of equity) + (proportion of debt × cost of debt)

Illustrations and further practice

Now try TYU question 6(a) from Chapter 9

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