Weighted average cost of capital (WACC) - part 1

In this lesson

1. 0:00 Weighted average cost of capital explained
2. 1:00 WACC formula and components breakdown
3. 2:27 Calculating cost of equity with dividend growth
4. 3:24 Finding equity proportion by book and market value
5. 4:53 Calculating cost of debt for preference shares
6. 6:04 Pulling together the WACC calculation
7. 7:29 Exam approach and key principles

About this lesson

You'll work through the WACC formula, calculate the cost of equity using the dividend growth model, determine the cost of debt, and then combine these with their respective weightings to find the overall average. This concept is essential for FM, AFM, and strategic modules where you need to evaluate investment decisions and company valuations. The lesson walks you through a worked example step by step, showing you how to handle both book value and market value approaches when weighting your capital sources. You'll see how to extract the cost of equity from dividend data, value irredeemable preference shares, and calculate proportions of equity and debt funding. A key takeaway is understanding why market values typically produce different results from book values — and how that affects your final WACC figure. By the end, you'll be confident applying this technique to exam questions involving multiple sources of capital.

Duration: 8m