IAI Actuarial Core Principles · Business Finance · Cost of capital and evaluating investment projects
Which item should be used to compute the equity weight in a WACC calculation?
The equity weight should be based on the market capitalisation of the ordinary shares. WACC weights use market values because they show the current value of each financing source, not historical book or nominal amounts.
- ABook value of share capital only
- BMarket capitalisation of the ordinary sharesCorrect
- CNominal value of shares
- DRetained earnings
- Book value of total assets
Explanation
WACC weights should reflect the current cost of raising funds, so market values are used. Market capitalisation of equity captures investors' current valuation, unlike book or nominal figures.
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