I had one more ahah moment doing Corp Fin questions Page 81. EP When calculating Economic Profit = NOPAT - $WACC. When calculating $WACC, it uses the capital (not book value) and for 1st year, it uses last year capital x WACC.
That’s the formula…
drk - could you clarify what you mean? I’m not sure what you noticed…
I think he’s referring to the depreciation of capital. Your capital shrinks as time goes on.
I did not realize couple of things 1. Assumed that for $WACC calculations, we should use book value. Obviously that does not make sense, we should use total capital rather than book value. $WACC. Weighted average cost of capital 2. Most important thing is, I realized was - when you are calculating $WACC for 2009. you should multiply WACC with 2008 Capital (Assuming end of year given) and not 2009. It tripped me in one of the questions
total capital = market value of debt + equity? youre confusing me.
Look at the problem 34B , page 81 in CFA Corporate Finance book. It says total capital = total assets (provided in the problem)