Every project must earn enough to pay the people who funded it. Shareholders want a return for risk. Lenders want interest. The tax authority lets the company deduct that interest. The company’s cost of capital is the average of all these required returns, weighted by how much each group has put in. It is the hurdle that every project is judged against.
This topic covers the cost of equity (the dividend valuation model with and without growth, the Gordon growth model for the growth rate, and the capital asset pricing model, CAPM), the cost of irredeemable and redeemable debt, convertible bonds, preference shares, the weighted average cost of capital (WACC), the link between WACC and company value, and when WACC can be used to appraise projects.
The previous topic covered capital rationing. The next covers portfolio theory. The May 2014 and November 2014 Pathfinder papers both tested these formulas.
In 30 seconds
Cost of equity: without growth, ke = d ÷ MV; with growth, ke = d0(1 + g) ÷ MV + g; by CAPM, ke = Rf + β(Rm − Rf). Use an ex-dividend price. Growth can be taken from history (geometric mean) or from g = r × b (return × retention). Irredeemable debt: pre-tax i ÷ MV, post-tax i(1 − t) ÷ MV. Redeemable debt: the IRR of the cash flows.
A convertible bond’s cost is the higher of the straight-bond cost and the cost assuming conversion. Preference shares: dividend ÷ MV, no tax relief. WACC = Σ (market value × cost) ÷ Σ market value, using post-tax debt cost. Equity costs more than debt because it is riskier. Use WACC for a project only if the project does not change business or financial risk.
Key terms in plain English
| Term | What it means |
|---|---|
| Cost of equity | The return shareholders require |
| Dividend valuation model | A share is worth the PV of its future dividends |
| Ex-dividend price | A share price that excludes an imminent dividend |
| Gordon growth model | Dividend growth equals return on retained profit times retention rate |
| Redemption yield | The IRR of a redeemable bond’s cash flows |
| Weighted average cost of capital (WACC) | The average cost of all capital, weighted by market value |
| Marginal cost of capital | The cost of the next increment of capital |
Syllabus check
This topic is in syllabus area C (financing decisions). It covers:
- the cost of equity by the dividend growth model and CAPM;
- the cost of fixed-interest capital;
- the weighted average cost of capital.
CAMA 2020 and the cost of capital
The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria.
| Section | What it says | Link to this topic |
|---|---|---|
| s. 305 | A director must act in good faith in the best interests of the company | Projects should beat the cost of the capital the company uses |
| s. 308 | A director must use the care, diligence and skill of a reasonably prudent director | Directors should test the rates used to judge investments |
| s. 377(1) and s. 378 | Directors prepare statements that follow IFRS and give a true and fair view | Decisions later affect reported assets, profit and cash |
| s. 385 | The directors’ report covers performance and risk | Major plans and risks are reported to shareholders |
Equity and debt compared
The cost of capital for investors is the return they require. For a company it is the return it must make on its investments to pay them. Investors measure it before tax. Companies get tax relief on interest, so the cost of debt to a company is after tax. The WACC is the average of all sources, weighted by market value. The marginal cost is the cost of the next capital raised.
Equity always costs more than debt because it is riskier:
- interest is often fixed and contractual while dividends are not
- lenders can take legal action and enforce security
- lenders are paid before shareholders if the company is liquidated
Tax relief lowers the cost of debt further.
Cost of equity
A share is worth the present value of its future dividends discounted at the cost of equity. The same model run in reverse gives the cost of equity from the share price.
No growth
Use this when the dividend stays the same every year.
Formula: ke = d ÷ MV
Example. A share costs ₦8.20 and pays a constant dividend of ₦0.70 a year.
- Write the formula. A dividend that never changes is a perpetuity, so the share price is the dividend divided by the return shareholders want. Turn that around and you have the return.
ke = d ÷ MV - Put in the numbers. d is the yearly dividend. MV is the market price of one share.
ke = 0.70 ÷ 8.20 - Divide.
ke = 0.0854 = 8.5%
Ex-dividend price
If the price includes a dividend that is about to be paid, take it out first. The buyer today gets that dividend straight away, so it says nothing about the dividends to come.
Example. The share price of ₦8.20 includes a dividend of ₦0.70 that is about to be paid. Later dividends stay at ₦0.70.
- Strip out the dividend due. What is left is the ex-dividend price.
8.20 − 0.70 = ₦7.50 - Divide the dividend by the ex-dividend price.
ke = 0.70 ÷ 7.50 = 0.0933 = 9.3% - Check what the mistake would cost. Using the full ₦8.20 gives 8.5%, which understates the cost of equity by 0.8 percentage points.
0.70 ÷ 8.20 = 8.5%
With growth
Formula: ke = d0(1 + g) ÷ MV + g, where d0 is the dividend just paid and g is the yearly growth rate.
Example. The share price is ₦8.20. A dividend of ₦0.70 has just been paid and dividends grow at 3.5% a year.
- Find next year’s dividend. The model values future dividends, so grow the last one by one year.
d1 = 0.70 × 1.035 = ₦0.7245 - Divide by the share price. This is the dividend yield.
0.7245 ÷ 8.20 = 8.84% - Add the growth rate. Shareholders earn the yield and also gain as the dividend grows.
8.84% + 3.5% = 12.34% - Round.
ke = 12.3%
CAPM
Formula: ke = Rf + β(Rm − Rf), where Rf is the risk-free rate, Rm the return on the market and β (beta) shows how strongly the share moves with the market.
Example. Rf is 4%, Rm is 7% and β is 0.92.
- Find the market premium. This is the extra return investors earn for taking market risk instead of the risk-free rate.
Rm − Rf = 7% − 4% = 3% - Scale it by beta. A β below 1 means the share is less risky than the market, so it earns less than the full premium.
0.92 × 3% = 2.76% - Add the risk-free rate.
ke = 4% + 2.76% = 6.76%
Estimating growth
From history: the geometric mean. Formula: g = (latest dividend ÷ earliest dividend)1/n − 1, where n is the number of years of growth.
Example. Dividends over five years were 100, 110, 120, 134 and 148.
- Count the years of growth. Five dividends give four gaps, not five.
n = 4 - Divide the latest dividend by the earliest.
148 ÷ 100 = 1.48 - Take the fourth root. This gives the average yearly growth factor.
1.481/4 = 1.103 - Subtract 1.
g = 0.103 = 10.3%
From profit kept: Gordon’s model. Formula: g = r × b. Here r is the return on opening capital employed and b is the share of profit retained. Profit kept in the business earns r, so the more a company keeps and the more it earns, the faster dividends can grow.
Example. ICAN’s XL Plc earns 10% on opening capital and retains 60% of its profit.
- Put in the numbers.
g = r × b = 10% × 60% - Multiply.
g = 6%
Problems with it: it relies on accounting profits, assumes r and b stay constant, is distorted by inflation and historic-cost assets, and assumes all new finance is equity.
Shortcomings of the dividend valuation model
Not all shares are valued for dividends (some firms pay none); growth is assumed constant; past patterns are assumed to continue; and share prices move daily and not always rationally. Dividend growth also has to match earnings growth in the long run.
Cost of debt
Lenders discount pre-tax flows. The company discounts post-tax flows, and that is the rate that goes into WACC.
Irredeemable debt
Formulas: pre-tax cost = i ÷ MV; post-tax cost = i(1 − t) ÷ MV. Here i is the yearly interest, MV the bond’s market price and t the tax rate.
Example. ICAN’s 6% bonds have a market price of 103.60 per 100. Tax is 25%.
- Find the pre-tax cost. This is what the lenders earn.
6 ÷ 103.60 = 0.0579 = 5.8% - Take off the tax relief. The company deducts the interest from its taxable profit, so only 75% of it is a real cost.
6 × 0.75 = 4.50 - Find the post-tax cost. This is the rate that goes into WACC.
4.50 ÷ 103.60 = 0.0434 = 4.3%
The coupon is the rate printed on the bond. It is not the yield, so always divide by the market price.
Redeemable debt
The cost is the redemption yield, which is the IRR of the bond’s cash flows. You cannot just multiply by (1 − t), because the repayment of principal gets no tax relief.
Example. ICAN’s 7% bond is priced at 96.25 per 100 and repays 100 in four years. Tax is 30%.
| Year | What happens | Cash flow per 100 |
|---|---|---|
| 0 | Buy the bond at its market price | −96.25 |
| 1 to 3 | Interest of 7, less tax relief of 2.10 (7 × 0.30) | 4.90 each year |
| 4 | Interest after tax of 4.90, plus repayment of 100 | 104.90 |
- Set out the cash flows. Tax relief cuts the interest, not the repayment. The table shows the result.
- Test two discount rates. The IRR is the rate at which the NPV is zero. ICAN’s NPV is +3.41 at 5% and −0.07 at 6%, so the IRR lies between them, very close to 6%.
- Interpolate. Move up from 5% by the share of the NPV gap that sits above zero.
IRR = 5% + [3.41 ÷ (3.41 + 0.07)] × (6% − 5%) = 5% + 0.98% = 5.98% - Round.
Post-tax cost of debt = 6.0%
Market value of a redeemable bond
A bond is worth the present value (PV) of its cash flows, discounted at the return lenders require.
Example. A 7% bond repays 100 in four years. Lenders require 8.14%.
| Year | Cash flow | PV at 8.14% |
|---|---|---|
| 1 | 7 | 6.48 |
| 2 | 7 | 5.99 |
| 3 | 7 | 5.55 |
| 4 | 7 | 5.13 |
| 4 | 100 (repayment) | 73.10 |
| Total market value | 96.25 |
Cash that arrives later is worth less today. That is why the 100 repayment, four years away, is worth only 73.10 now. Rounded discount factors can leave your own figures a little different.
Convertible bonds
The cost is the higher of two figures: the straight-bond cost and the cost if the holder converts. Work out the conversion cost from the share value expected at conversion.
Example. ICAN’s 7% convertible bond is priced at ₦108.70. In three years the holder can convert it into 40 shares, each expected to be worth ₦3.20. Tax is 30%.
- Value the shares at conversion. The holder swaps the bond for shares instead of taking repayment.
40 × ₦3.20 = ₦128 - Work out the interest after tax.
7 × (1 − 0.30) = 4.90 a year - Set out the cash flows. Year 0 is −108.70. Years 1 and 2 are 4.90 each. Year 3 is 4.90 plus the shares, 132.90.
- Find the IRR. ICAN’s NPV is +2.52 at 9% and −0.38 at 10%, so the IRR lies between them.
IRR = 9% + [2.52 ÷ (2.52 + 0.38)] × (10% − 9%) = 9.87% - Round.
Cost with conversion = 9.9% - Compare. The straight-bond cost is lower, so the higher figure, 9.9%, is the cost and conversion is expected.
Preference shares
Irredeemable preference shares are costed like equity with no growth: dividend ÷ MV. There is no tax relief on dividends.
The weighted average cost of capital
WACC = Σ (market value of each source × its cost) ÷ Σ market values, with debt at its post-tax cost.
In plain words: multiply each source of money by what it costs, add the results, then divide by the total money raised. Bigger sources count for more.
Example. ICAN’s example: equity ₦42.0m at 7.5%, preference shares ₦2.66m at 6%, bonds ₦30.3m at 3.5% and a bank loan ₦5.0m at 3.2%. The debt costs are already after tax.
| Source | Market value (₦m) | Cost | MV × cost (₦m) |
|---|---|---|---|
| Equity | 42.00 | 7.5% | 3.150 |
| Preference shares | 2.66 | 6.0% | 0.160 |
| Bonds (post-tax) | 30.30 | 3.5% | 1.061 |
| Bank loan (post-tax) | 5.00 | 3.2% | 0.160 |
| Total | 79.96 | 4.531 |
- List each source. Use market values, not book values. Debt goes in at its post-tax cost.
- Multiply each value by its cost. The last column shows how much each source adds to the total.
- Add the columns.
Market values: 42.0 + 2.66 + 30.3 + 5.0 = 79.96
Weighted costs: 3.150 + 0.160 + 1.061 + 0.160 = 4.531 - Divide.
WACC = 4.531 ÷ 79.96 = 0.0567 = 5.7%
Sense check. The answer must sit between the cheapest source (3.2%) and the dearest (7.5%). Equity is 52.5% of the money (42.0 ÷ 79.96), so the average leans towards its 7.5%.
WACC and value
For constant annual earnings, total company value = earnings × (1 − t) ÷ WACC. This is a perpetuity: a steady yearly amount divided by the rate.
Example. A company earns ₦12m a year after tax, which is the earnings × (1 − t) figure. What is it worth at three different WACCs?
| WACC | Working | Company value (₦m) |
|---|---|---|
| 12% | 12 ÷ 0.12 | 100 |
| 10% | 12 ÷ 0.10 | 120 |
| 6% | 12 ÷ 0.06 | 200 |
A lower WACC means a higher value. The aim is a capital structure that minimises WACC.
When WACC can be the project discount rate
- the project is small compared with the company;
- its business activity is similar to the company’s;
- it is financed in a similar mix to the company’s;
- existing providers of capital do not change the returns they require.
In other words, the project must not change the company’s business risk or financial risk. If it does, a project-specific rate from CAPM is better. A project with an IRR below WACC but above the security market line would be wrongly rejected, and one above WACC but below the line wrongly accepted.
The rules in more depth
Why use market values for weights
They show what investors would require today, not the historic book cost.
Why the ex-dividend price
A cum-dividend price includes a dividend that the buyer receives straight away, so it overstates what the future dividends are worth.
Why redeemable debt needs an IRR
The principal repaid at the end has no tax relief, so the after-tax cost is not simply pre-tax × (1 − t).
Why a convertible bond is costed at the higher rate
The investor will convert only if it pays, so the holder’s expected return is at least the higher of the two outcomes.
Effect on analysis
Compute each component, state the weights at market value, calculate WACC and note whether it is the right rate for the project.
Worked examples
Example 1: no growth. A share is priced at ₦2.50 ex-dividend and pays a constant ₦0.30.
- Write the formula. With no growth the dividend is a perpetuity, so the cost of equity is its IRR.
ke = d ÷ MV - Put in the numbers. The price is already ex-dividend, so use it as it is.
ke = 0.30 ÷ 2.50 - Divide.
ke = 0.12 = 12.0%
Example 2: with growth. The share price is ₦4.00 ex-dividend. The dividend just paid is ₦0.40 and growth is 5%.
- Write the formula.
ke = d0(1 + g) ÷ MV + g - Find next year’s dividend. The dividend just paid is d0. Grow it by 5%.
d1 = 0.40 × 1.05 = ₦0.42 - Divide by the ex-dividend price.
0.42 ÷ 4.00 = 0.105 - Add the growth rate.
ke = 0.105 + 0.05 = 15.5%
Example 3: Gordon growth. Profit after tax is ₦60m on opening capital employed of ₦400m. The company retains 40% of profit.
- Find r. r is profit after tax as a share of opening capital employed.
r = 60 ÷ 400 = 15% - Multiply by the retention rate. The company keeps 40% of its profit, so b = 40%.
g = r × b = 15% × 40% = 6% - Use the result. This g goes into the dividend growth model.
Example 4: WACC. Equity ₦300m at 16%; debt ₦100m with a pre-tax cost of 12% and tax at 30%; preference shares ₦50m at 10%.
| Source | Market value (₦m) | Cost | MV × cost (₦m) |
|---|---|---|---|
| Equity | 300 | 16.0% | 48.0 |
| Debt (post-tax) | 100 | 8.4% | 8.4 |
| Preference shares | 50 | 10.0% | 5.0 |
| Total | 450 | 61.4 |
- Convert debt to its post-tax cost. Interest gets tax relief. Preference dividends do not.
12% × (1 − 0.30) = 8.4% - Multiply each market value by its cost. The last column of the table.
- Add the columns.
Market values: 300 + 100 + 50 = 450
Weighted costs: 48.0 + 8.4 + 5.0 = 61.4 - Divide.
WACC = 61.4 ÷ 450 = 0.1364 = 13.6%
How to score full marks
- Write the formula first and then substitute.
- Use ex-dividend prices and post-tax debt.
- Show the interpolation for redeemable debt and convertibles.
- Weight by market value and show the table.
- Comment on the assumptions of the models.
- State when WACC is appropriate for a project.
Common mistakes in the exam
- Using a cum-dividend price.
- Forgetting the (1 + g) in the numerator.
- Using the coupon as the cost of debt.
- Multiplying a redeemable bond’s yield by (1 − t).
- Weighting by book values.
- Giving preference shares tax relief.
Quick revision
- ke = d ÷ MV; ke = d0(1 + g) ÷ MV + g; CAPM.
- g = r × b, or the geometric mean of past growth.
- Debt: i(1 − t) ÷ MV if irredeemable; IRR if redeemable.
- Convertible: the higher of two costs. Preference: d ÷ MV.
- WACC by market-value weights, post-tax debt.
- Value = earnings(1 − t) ÷ WACC.
- CAMA 2020: ss. 305, 308, 377(1), 378, 385.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. A share with a constant ₦0.70 dividend and an ex-dividend price of ₦8.20 has a cost of equity of about:
- 8.5%
- 9.3%
- 12.3%
- 7%
Show the answer
A. 0.70 ÷ 8.20.
Question 2. In ke = d0(1 + g) ÷ MV + g, d0 is:
- The next dividend
- The dividend just paid
- The share price
- The tax rate
Show the answer
B. It is grown by one year.
Question 3. Dividend growth by Gordon’s model is:
- g = r × b
- g = r ÷ b
- g = b ÷ r
- g = r + b
Show the answer
A. Return times retention.
Question 4. Risk-free 5%, market 14%, beta 1.2 give CAPM cost of equity of:
- 15.8%
- 17%
- 12%
- 19.8%
Show the answer
A. 5% + 1.2 × 9%.
Question 5. The post-tax cost of 6% irredeemable debt at 103.60 and 25% tax is about:
- 4.3%
- 5.8%
- 6%
- 3%
Show the answer
A. 6 × 0.75 ÷ 103.60.
Question 6. The cost of redeemable debt is found by:
- Pre-tax rate × (1 − t)
- An IRR calculation
- Dividing by two
- Coupon only
Show the answer
B. The principal has no tax relief.
Question 7. Preference share cost is:
- Dividend ÷ MV, with no tax relief
- Dividend × (1 − t)
- The coupon
- Zero
Show the answer
A. Dividends are not deductible.
Question 8. WACC weights are normally:
- Book values
- Market values
- Nominal values
- Equal
Show the answer
B. They show current investor values.
Question 9. A lower WACC means a company value that is:
- Lower
- Higher
- Unchanged
- Zero
Show the answer
B. Value = earnings(1 − t) ÷ WACC.
Question 10. Which section of CAMA 2020 sets the director’s duty of care and skill?
- Section 308
- Section 400
- Section 405
- Section 409
Show the answer
A. Directors should test the assumptions behind a decision.
Written questions
Question 11 (10 marks). (a) Explain why equity costs more than debt. (4 marks) (b) State the conditions under which WACC can be used to appraise a project. (4 marks) (c) State two shortcomings of the dividend valuation model. (2 marks)
Question 12 (20 marks). Ede Plc has 10m shares priced at ₦5.00 ex-dividend. The next dividend, due in a year, is ₦0.45 a share and dividends are expected to grow at 4% a year. It has ₦20m nominal of 8% irredeemable bonds trading at ₦80 per ₦100 nominal, and ₦4m of 10% preference shares with a market value of ₦5m. Tax is 30%. The risk-free rate is 5%, the market return 14% and the equity beta 1.2.
(a) Calculate the cost of equity by the dividend growth model. (3 marks) (b) Calculate it by CAPM and comment on the difference. (3 marks) (c) Calculate the post-tax cost of the bonds and of the preference shares. (4 marks) (d) Calculate the WACC using the dividend growth cost of equity. (6 marks) (e) State when this WACC may be used to appraise a project. (4 marks)
Question 13 (10 marks). (a) A company earns 15% on opening capital employed and retains 40% of profit. Estimate dividend growth. (2 marks) (b) A 7% bond with four years to par is priced at 96.25. Explain how to find its post-tax cost with tax at 30%. (4 marks) (c) A convertible’s straight-bond cost is 5% and its cost assuming conversion is 9.9%. State the cost and why. (4 marks)
Model answers
Show the model answer to Question 11
(a) Equity versus debt (4 marks). Interest is often fixed and contractual while dividends are uncertain. (1) Lenders can take legal action and enforce security. (1) Lenders are paid before shareholders on liquidation. (1) Interest is tax deductible, which lowers the cost of debt further. (1)
(b) WACC conditions (4 marks). The project is small compared with the company; its business is similar; its financing mix is similar; and existing investors do not change their required returns. (1 each)
(c) Shortcomings (2 marks). Any two: not all shares are valued for dividends; growth is assumed constant; past patterns are assumed to continue; share prices are volatile. (1 each)
Show the model answer to Question 12
(a) Dividend growth (3 marks). The next dividend is given, so there is no need to grow it.
- Formula.
ke = d1 ÷ MV + g - Substitute.
ke = 0.45 ÷ 5.00 + 0.04 - Answer.
0.09 + 0.04 = 13% (3)
(b) CAPM (3 marks).
- Formula.
ke = Rf + β(Rm − Rf) - Substitute.
ke = 5% + 1.2 × (14% − 5%) - Calculate.
1.2 × 9% = 10.8%, so ke = 5% + 10.8% = 15.8% (2) - Comment. The two models use different inputs and assumptions, so they give different estimates. CAPM allows for systematic risk. (1)
(c) Debt and preference (4 marks).
- Interest and price of the bonds. The bonds are ₦20m nominal at ₦80 per ₦100. Interest is 8% of ₦100.
Interest = ₦8; market price = ₦80 - Pre-tax cost.
8 ÷ 80 = 10% - Post-tax cost. Tax relief cuts the cost by 30%.
10% × 0.7 = 7% (2.5) - Preference shares. The dividend is 10% of ₦4m. Dividends get no tax relief.
₦0.4m ÷ ₦5m = 8% (1.5)
(d) WACC (6 marks).
| Source | Market value working | Market value (₦m) | Cost | MV × cost (₦m) |
|---|---|---|---|---|
| Equity | 10m × ₦5.00 | 50 | 13% | 6.50 |
| Bonds | ₦20m × 0.80 | 16 | 7% | 1.12 |
| Preference shares | Given | 5 | 8% | 0.40 |
| Total | 71 | 8.02 |
- Market values. Shares: 10m × ₦5.00 = ₦50m. Bonds: ₦20m nominal at 80% = ₦16m. Preference shares: ₦5m. Total ₦71m.
(2) - Weighted costs. Multiply each market value by its cost and add them.
50 × 13% + 16 × 7% + 5 × 8% = 6.5 + 1.12 + 0.4 = 8.02 (2.5) - Divide.
WACC = 8.02 ÷ 71 = 0.1130 = 11.3% (1.5)
(e) Use (4 marks). Only if the project is small, in the same business, financed in a similar mix, and does not change investors’ required returns. (4)
Show the model answer to Question 13
(a) Growth (2 marks).
- Formula.
g = r × b - Calculate.
g = 15% × 40% = 6% (2)
(b) Post-tax cost (4 marks).
- Set the market value as the outflow. The market price of 96.25 is the cash paid at time 0.
(1) - Work out the yearly flows. Interest less tax relief is 7 × 0.7 = 4.90 a year, with par of 100 repaid at year 4.
(1.5) - Interpolate. Discount at two rates and interpolate to find the IRR, which is about 6%.
(1.5)
(c) Convertible (4 marks). The cost is the higher, 9.9%. (2) The market price shows that conversion is expected, so the investors’ return and the company’s cost are based on conversion. (2)
Pathfinder on Cost of equity, debt, convertibles and WACC
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Question 7 gave a Treasury bill rate of 15%, a market return of 21% and a beta of 1.8, and the CAPM answer is 15% + 1.8 × 6% = 25.8%. Question 8 gave a recent dividend of ₦3.00, a cost of equity of 15% and growth of 5%, and the value is 3.00 × 1.05 ÷ (0.15 − 0.05) = ₦31.50. Read the section on the cost of equity.
Revise first: Cost of equity
The compulsory question asked for a project-specific cost of capital after ungearing and regearing betas, then CAPM for the cost of equity, the after-tax cost of debt (8% × 0.75 = 6%) and a WACC of about 18% on a 100 : 30 equity to debt basis. Read the sections on debt and on WACC.
Revise first: The weighted average cost of capital
Source: ICAN Pathfinder, Strategic Financial Management. Diets covered: May 2014 multiple-choice 7 and 8; November 2014 question 1(a).
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