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Financial Concepts
Your calculated WACC. ( Market value of equity and debt are given in thousands)
Risk-Free Rate
Beta
Expected return on the market
Credit Spread
Market value of equity
Market value of debt
Marginal Tax Rate
Percentage of Debt
in capital structure
Percentage of Equity
in capital structure
Cost of Equity = 8.80%
Capital Asset Pricing Model Formula (Cost of Equity)
RF + Beta (Market Risk Premium)
Cost of Debt Formula
Risk Free Rate + Credit Spread
Cost of Debt= 5.0%
Weighted Average Cost of Capital (WACC)
Cost of debt (1- tax rate) * Percentage of debt + Cost of Equity* Percentage of equity
How data was used to calculate WACC. This would be the formula and the formula with your values substituted.
WACC = (E/E+D) rE + D/(E+D) rD (1-TC)
(5% * (1- .4)) * 14.29% + (8.80%* 85.71%) = 7.971%
Sources for your data
Sources of the WACC are found in annual reports and other sec filings. The WACC is used as a mechanism to discount free cash flows or to derive the cost of money for a particular firm. The WACC is very sensitive to changes in the overall estimates used. A 100 basis...
It is therefore, paramount to arrive a figure the best reflects the economic reality of the firm. To accomplish this task, the overall sources of data should look over a business cycle to arrive at the appropriate cost of debt and cost of equity. Annual reports, 10-K, and the 10-Q, are all sources I used to compile the necessary data. By dividing tax expense by EBT, an appropriate The information contained in these filings details the overall cost of debt for the firm.
The cost of equity is somewhat more complicated as beta typically relies on the most recent stock price information. Beta should be adjusted to reflect the performance of company over a business cycle. The sources I used for historical beta are Yahoo Finance, and Morningstar. For a historical perspective of an equity risk premium an appropriate source can be obtained through Dimson, Marsh, and Staunton (2008), Tables 10, 11.
4. A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any
The answer should be a guideline for overall valuation. The complexity of precisely indicating the cost of equity can be difficult. Beta, in some instances, may not accurately reflect the overall risk of the security. For example, the beta could have been derived in a…
References:
1) Cheremushkin, Sergei Vasilievich (December 21, 2009). "How to Avoid Mistakes in Valuation -- Comment to 'Consistency in Valuation: A Practical Guide' by Velez-Pareja and Burbano-Perez and Some Pedagogical Notes on Valuation and Costs of Capital."
2) Frank, Murray; Shen, Tao (2012). "Investment, Q, and the Weighted Average Cost of Capital"
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