Its just one thats really getting under my skin. I think its easy but I cant get it. I want to stick my pen in my ear every time I see a question.作者: ohai 时间: 2011-7-13 16:12
Hey, this looks like new stuff that wasn't on L3 when I took it.
Is the basic idea about calculating WACC with total pension assets and liabilities merged into the company balance sheet?作者: thommo77 时间: 2011-7-13 16:12
^ correct. You have a pension whose assets and liabilities are managed. They each have some beta in their portfolio, so the main idea is that you need to reflect the pension into part of your operating assets.
So yes, you merge them into the balance sheet. Lucky for you this wasn't on...it was on last year's exam, so I don't imagine this being on the AM session again.作者: aidebaobao 时间: 2011-7-13 16:12
bchad - yes, and I actually found it to be one of the more interesting readings of the curriclulum (might be because my clients are pension plans).
By not including Pension Assets and Liabilities in the WACC calculation, many firms overstate their WACC and hence pass on projects whose NPV would have otherwise cleared the more correct (lower) hurdle. Futher, firms may be better off reducing risk in their pension plan, and increasing risk budget in its operating business where they are more likely to find more profitable opportunities (than investing in other companies passively via the Pension Plan)
Lots of other good stuff in the reading that I am realizing I need to review again.作者: jmh530 时间: 2011-7-13 16:12
mib20 Wrote:
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> The way they calculate the operating asset and
> pension asset beta is fine and correct, but only
> including the true operating asset beta in the
> CAPM formula, and then calling that your WACC
> seems to be a very poor method of calculating the
> firm's true cost of capital. If anything, the
> total asset beta should be included. Better yet,
> we could lever up the true asset beta to get true
> equity beta, solve for CAPM, and then calculate
> WACC if a cost of debt is given to us.
>
> I cannot wrap my head around the way they
> calculated it.
I was just reviewing this question, and this is what I was thinking too. It doesn't make sense to me why they used the operating beta and not total firm beta作者: Analyze_This 时间: 2011-7-13 16:12
Sorry to bring this up again. This section is using the following formula:
The WACC formula used in this section seems to ignore the cost of debt entirely.
Any comments?作者: mar350 时间: 2011-7-13 16:12
Asset beta is different from equity beta. The formula assumes that the debt to equity ratio for the market is the same for the company hence the WACC is the cost of capital (debt + equity) as measured against the entire market.作者: NakedPuts2011 时间: 2011-7-13 16:12
Also the formula is using "operating asset beta" instead of "total asset beta". i would recommend you to buy study session 5 from finquiz.com and attempt questions for this los. It helped me understand all the complications and linkages between the pension asset balance sheet + beta and sponsor's balance sheet + beta (equity, operating and total)作者: IAmNeil 时间: 2011-7-13 16:12
^is that you mitchels作者: mik82 时间: 2011-7-13 16:12
thommo77 Wrote:
-------------------------------------------------------
> ^is that you mitchels
keep on guessing 作者: Colum 时间: 2011-7-13 16:12
also a point on this reading, look at the command words in the LOS, no mention of calculate, just: explain/compare contrast/discuss
-dont worry about calculating作者: Unforseen 时间: 2011-7-13 16:12
TOcfaGuy Wrote:
-------------------------------------------------------
> also a point on this reading, look at the command
> words in the LOS, no mention of calculate, just:
> explain/compare contrast/discuss
> -dont worry about calculating
Don't rely on the LOSs, they can be misleading. The calculation of WACC was required in
2009 AM Exam. Most of all, many questions in past exams were out of the scopes of LOSs.
