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.

Unforseen

TOcfaGuy Wrote:
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> 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.

mik82

thommo77 Wrote:
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> ^is that you mitchels

keep on guessing

Colum

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

IAmNeil

^is that you mitchels

NakedPuts2011

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)

Analyze_This

Sorry to bring this up again. This section is using the following formula:

WACC = risk free rate + asset beta * market risk premium

I have never seen this formula before. Usually its


WACC = cost of equity * E/(D+E) + cost of debt *(1-t) * D/(D+E)

and

Cost of equity = risk free rate + equity beta * market risk premium

The WACC formula used in this section seems to ignore the cost of debt entirely.

Any comments?

mar350

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.

jmh530

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

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.