WACC

In this lesson

1. 0:00 Weighted average cost of capital overview
2. 0:22 WACC formula and components explained
3. 1:54 When to use WACC in project appraisal
4. 3:01 Calculating NPV using WACC discount rate

About this lesson

Understanding WACC is essential for AFM and other advanced modules, as it's used to evaluate whether projects create value for the company. The WACC formula weights the cost of equity and cost of debt according to their market values in the company's capital structure, with an adjustment for the tax deductibility of interest. You'll explore multiple approaches to calculating the cost of equity, understand how to handle different debt sources, and learn to account for preference shares and other financing instruments. The lesson also covers the key conditions for using WACC in project appraisal: the capital structure must remain constant and business risk must not change. When these conditions hold, WACC becomes your discount rate for evaluating investment projects. A critical insight from this lesson is recognising when WACC cannot be used. If a new project changes the company's capital structure or introduces different business risk, you'll need to adjust the discount rate instead of relying on the existing WACC. The exception is for small projects, where existing WACC may still apply. By mastering these concepts, you'll be able to confidently tackle AFM exam questions that require you to calculate WACC and use it to assess project viability through net present value analysis.

Duration: 3m