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Calculating the WACC
Through my textbook reading and some online research I'm having difficulty correlating the material to do a portion of my assignment. If anyone could assist in some direction I would greatly appreciate it. I have looked at this website WACC (Weighted Average Cost of Capital) Homework Help | WACC Assignment Help | WACC Online Tutoring | Help WACC Problem which appears to have similar structure of the assignment, but it gives the cost of specific capital % and my problem does not. The attached file has all the information the assignment has provided, yet I think there is critical information missing to calculate the fictitious company's WACC. If you feel that everything is there to calculate the WACC could you point me in the right direction. Could use the help ASAP or by tomorrow evening 1/25/2013.
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You're correct that the attached schedule doesn't give all the data needed for a WACC calc. From the schedule you can determine each component's weight in the firm's capital structure, but to go any further with the WACC computation you also need the costs of the individual pieces, as well as the firm's marginal tax rate. (The latter is necessary for figuring the debt's after-tax effective cost.)
If you do manage to get your hands on the additional info, this simplified example might help. WACC is one of those rare terms in which the name (surprise surprise) is helpfully descriptive: it really is just a weighted average of the individual capital costs. Suppose a firm whose cap structure is simply 1,000,000 of debt and 3,000,000 of equity. Thus debt represents 1/4 of the total capital and equity makes up the other 3/4. The debt's cost is 10%. Generally, this is the interest rate the firm is paying the bondholders (i.e. the coupon rate) but that isn't always the case. If the debt is trading in the market at something other than its face value, then the debt's true cost for WACC purposes would differ from its face or nominal rate. However, if you're just provided the debt's cost in the problem, you can take it as such. The firm's marginal tax rate is (say) 30%. That means the debt's after-tax cost is 7%. This after-tax cost is the one that matters for WACC calcs. Suppose finally that the equity's cost is 27%. Then WACC is just the weighted average of the two individual costs... WACC = 0.07(1/4) + 0.27(3/4) = 22% |
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