How Do You Answer Cost of Capital Questions in ACCA FM?

Cost of capital is a core ACCA FM topic that underpins investment appraisal and financing decisions. Questions typically ask you to calculate the cost of equity, the cost of debt and the weighted average cost of capital (WACC) for a company. These are method-driven marks — a clear, logical layout is what scores.

Cost of equity

Two main models appear:

• The dividend valuation model (with or without growth) — using the current dividend, growth rate and share price.
• The capital asset pricing model (CAPM) — using the risk-free rate, equity beta and the market risk premium.

Pick the model the question points you toward, state your inputs clearly, and show the calculation.

Cost of debt

Remember to use the after-tax cost of debt in WACC, since interest is tax-deductible. For irredeemable debt it's straightforward; for redeemable debt you'll usually need the internal-rate-of-return (yield to maturity) approach using linear interpolation.

Bringing it together in WACC

Weight each source of finance by its market value (not book value), then combine. Watch the classic slips: using book values for weights, forgetting the tax shield on debt, or mismatching the number of shares and the share price.

Because these are method marks, tidy workings protect your score even if an input is off. Practising full cost-of-capital questions and marking them against the official ACCA scheme with The 50% Club shows you exactly where your method breaks down — the fastest route to reliable marks.