ACCA P4 AFM Advance Financial Management

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ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang




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, P4 Chapter 3 Content


1 WACC


2 Cost of Equity


3 Cost of Debt


4 How do lenders set their interest rate


5 The use of WACC as discount rate


6 Analysis of Comprehensive Example

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, Chapter Summary


Cost of Equity
• CAPM
• DVM
• M+M




The Weighted
Average Cost
of Capital

Cost of Debt
When can WACC
• Irredeemable
be used as a dis-
• Redeemable
counted rate?
• Credit Spreads



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, 1.WACC

 Definition: WACC is derived by finding a firm's cost of equity an
d cost of debt and averaging them according to the market valu
e of each source of finance.
 The formula for calculating WACC is given on the exam formul
a sheet as :
 Ve   Vd 
WACC   
 e 
k  kd (1  T )
Ve  Vd  Ve  Vd 
 Ve and Vd are market values of equity and debt respectively.
 ke and kd are returns required by the equity holders and the debt hol
ders respectively.
 T is the corporate tax rate
 ke is the cost of equity
 kd (1-T) is the cost of debt
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