MM capital structure calculations - part 2

In this lesson

1. 0:00 M&M alternative WACC formula introduction
2. 1:21 Calculating WACC using M&M approach
3. 3:03 Verifying results with standard WACC formula
4. 4:05 Summary of M&M formulas and key takeaways

About this lesson

This video walks you through the formula structure, applies it to a worked example using comparable companies, and shows you how to verify your answer using the traditional WACC method. You'll understand when and why to use this approach in FM, AFM, and related papers where capital structure and gearing calculations appear. The M&M 1963 with tax model underpins all three key formulas covered here: one for valuing a geared firm, one for calculating cost of equity with gearing, and this one for WACC. The alternative WACC formula requires fewer inputs—the cost of equity for the geared firm, the market value of debt, the tax rate, and the market value of equity—making it valuable when exam questions don't provide enough data for standard calculations. Working through the Twitter and Kestrel example shows how to plug numbers in correctly and what to expect in your final answer. The video includes a practical double-check method: if you have enough information, you can calculate WACC both ways and confirm they match. This builds confidence in the method and deepens your understanding of why both approaches work. If these calculations feel heavy going, remember this is a relatively small part of the syllabus, so don't let the complexity shake your confidence—practice and familiarity will make the process feel more natural over time.

Duration: 6m