ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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What is the formula to calculate the weighted average cost of capital (WACC)?

(Ve/(Ve + Vd)) x Ke + (Vd/(Ve + Vd)) x Kd (1 - T)
(Ve + Vd) x Ke + (Vd) x Kd
(Vd/(Ve + Vd)) x Ke + (Ve/(Ve + Vd)) x Kd
Ve x Ke + Vd x Kd

The correct answer is: (Ve/(Ve + Vd)) x Ke + (Vd/(Ve + Vd)) x Kd (1 - T)

The formula to calculate the weighted average cost of capital (WACC) is based on the proportionate weight of equity and debt capital in a company's capital structure, along with the cost of these sources of financing. The correct formula reflects the following components: 1. **Equity and Debt Proportions**: It takes the market value of equity (Ve) and the market value of debt (Vd) to determine their respective weights in the overall capital structure. The formula uses Ve/(Ve + Vd) for the equity weight and Vd/(Ve + Vd) for the debt weight. 2. **Cost of Equity and Cost of Debt**: The cost of equity (Ke) represents the return required by equity investors, while the cost of debt (Kd) represents the return required by debt holders. 3. **Tax Shield**: Since interest payments on debt are tax-deductible, the formula incorporates the tax shield effect through the term (1 - T), where T is the corporate tax rate. This effectively reduces the overall cost of debt when calculating WACC, reflecting the advantage of financing through debt. Given these components, the correct formula accurately combines these factors to calculate WACC as follows: \[ WACC