WACC matter, assets, one

king_kong

Another one that I don't think is hard but my mind can't get it no matter how many times I read it.

Looking for how to measure the wacc using pension assets. Could you guys make it easy for me again!!

Thanks again in advance.

Analti_Calte

Me too - I always get these wrong - there has to be an easy way to remember how to do it.

bkballa

Review question 4 from the 2009 am. they give a pretty good explanation there.

mp3bu

if it was on the 2009 AM, why do you think it will be there in 2010? i thought CFAI doesn't like repeating things.

cityboy

From the the pension balance sheet (liabilities and assets), calculate the total assets and then you can calculate the total asset Beta as:

Total Beta = Weight pension liabilities * Pension Beta + Weight operating liabilities * liabilities Beta + weight operating assets * Operating Beta

Typically As
Pension Beta = 0
Operating liabilities Beta = 0

You're left with
Total Beta = weight operating assets * Operating Beta

Use that total beta and plug it back in the equation below to isolate the "true" operating Beta

Total Beta = Weight operating assets * True Operating Beta + Weight pension assets * Pension Beta

That's about it...

J.

dyga

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.

ohai

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?

thommo77

^ 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.

aidebaobao

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.

jmh530

mib20 Wrote:
-------------------------------------------------------
> 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