When using the economic income short cut aka beg MV time required rate of return…is the require rate of return Wacc? (i thought it was but thought id check…or cost of equity)… Also when discounting EP back to get MVA is the discount rate Wacc as well (again double checking?)
My understanding is that you use the WACC when dealing with EI and EP. For example, you will notice the link between capital budgeting and EVA when you discount EP in cap budgeting. This gets you MVA. MVA = EVA (or equally, EP) / WACC. Can anyone else confirm if my understanding is correct??
economic income for the first year would be (NPV+Initial outlay)*Wacc correct on the second statement too.
gracias…thats what i thought but rather be safe than sorry…thats what she said!!!
there was an economic income q on one of the CFAI sample exams - it used the WACC as the Required rate of return and multiplied by beginning market value to find EI.