Topic 4 – Determination of Weighted Average Cost of Capital, WACC

ISSUE 4– DATE 19 JULY 2015

1. INTRODUCTION AND OBJECTIVE

This article attempts to discuss on some basic principles that should be considered when determining the WACC, which is the discount rate used when using the FCFF method (discussed in Topic 2).

Method Explanation
Free Cash Flow to Firm (FCFF)

FCFF derives the enterprise value attributable to the stakeholders which comprise of both the equity and debt providers of a proposed power plant under evaluation.

The Internal rate of Return (IRR), as determined using the net cash flow from FCFF is known as the project IRR.

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THANKS FOR READING.

This article is prepared by Ong Tee Chin, CFA, FRM, and represents the view of the author. He can be contacted at ong@atlantiscapital.org for any further enquiries on the contents of this article.

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CERTIFICATION

Chartered Financial Analyst
CFA Institute



Financial Risk Manager
Global Association of Risk Professionals (GARP)

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