in dividends or stock price over the years. And hence these would not be an accurate projection of the cost of equity.The risk-free rateused in the calculations by Kyle Brooks is based on the 5-year government bond yield which we feel is not broad enough to capture the fluctuations. b)Cost of Debt - For calculating the cost of debt, it is always recommended to use the market interest rate or the actual rate the company is paying. Kyle Brooks has used the weighted average of the rate Royal Mail is paying on it’s current debt (0.9%) and the rate which Royal Mail is paying for it’s non-current debt (4.375%). For the non-current debt, he used the annual coupon rate of a 10-year bond issued by Royal Mail. The coupon rate does not take into account the existing conditions in the market which might affect the investors return and hence is not an accurate measure to be used.c)Book Value vs Market Value –While estimating WACC we are concerned with how much willit cost the company to raise money today. And a better way for this is to use the Market value as against the book value. The book value is used for accounting purposes whereas market value is used for estimating present value. The weights for debt and market value should not be calculated using book value.
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