Calculating WACC | WACC Calculation Example

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Calculating WACC | WACC Calculation Example

I have been asked to calculate the WACC using the following info: Capital structure: Ordinary shares (fully paid) :1000000, preference shares: (11%) 400000, debentures: (10%) 600000. The ordinary share holders expect a divident of 14% per year. Corporate tax is estimated at 30%.
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I did a bit of work on the above challenge, but I'm not sure if I'm on the right track... could someone point out if there are any mistakes? (600,000/2.000,000 * 10% * (1-30%)) + (400,000/2.000,000 * 11%) + (1.000,000/2.000,000 * 14%) = 19.2% Thank you for any help provided.

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		0 Mudedla Srinivas Kumar, India
	Calculation of WACC Though your calculation seems O.K. factoring for Cost of Equity would have made your calculation more refined. which is as follows: Cost of Equity should be : Risk Free return + Beta*Market price.

		0 Antonio Villa Mardon Economist, Peru
	WACC You need to modify the cost of equity as follows: CE = RfR + B ((Rm-RfR), being RfR the risk free rate B, the beta Rm Expected market return. This is a basic calculation as you would have to include some risk premiums for the equity, as an example country risk, which is calculated as the differential between spread of a 10yr tBond and the respective spread, lets say EMBI.

		0 bhavik, India
	Response to Calculation of WACC Though the calculation is correct, you could have calculated KE using the formula given below i.e. KE = D/PE+G Where, D = Dividend = the amount of dividend expected, PE = current market price, G = avg growth of the industry. For more details you may refer to the book by I M Pandey .

		1 Muhammad Wasim Student (MBA), Pakistan
	WACC Calculation As regards to this calculation, I got a result of 11.3% instead of 19.2%, without taking into account the beta and risk free return. Can you please confirm.

		2 Rishi R Koirala Teacher, Nepal
	WACC Calculation If you calculate the WACC the following way: 600,000 / 2,000,000 * 10% * (1 - 0.3) + 400,000 / 2,000,000 * 11% + 1,000,000 / 2,000,000 * 14% = 11.3% I may be wrong but confident. Please confirm.

		1 Blessing Katuka, Zimbabwe
	Calculation of WACC Normally the following steps must be done to calculate WACC: - Determine different sources of finance. - Calculate marginal component costs of capital for each category or component. - Combine component costs and introduce corporate tax. NB: corporate tax will only affect cost of debt and we need after tax cost to calculate WACC.

		2 Ahid Moghal, United Kingdom
	Calculation of WACC I calculate using a tableau with 5 columns. That makes life much easier, and you can see the whole calculation in one go: The 5 columns are: 1. Source: list all the sources of finance in the balance sheet - I prefer in order of importance 2. Amount: amount as listed in the balance sheet 3. Market Value of Source: calculate the MV of each source - this reflects the current risk perceived by the market for each source. Add the total of this value. 4. Rate: list the required rate of return by each category. If the category distribution is before tax, then the rate should be net of tax. Otherwise the rate should be gross. 5. WACC: now calculate the proportion of each finance multiplied by its rate for each category of finance and add the total. This now is your WACC.

		1 Moderated AI Netherlands
	Step-by-step Calculation of WACC WACC stands for Weighted Average Cost of Capital. It is a financial metric used to calculate the average cost of the various sources of financing used by a company to fund its operations and investments. Here's the step-by-step calculation of WACC: DETERMINE THE PROPORTION OF EACH SOURCE OF CAPITAL: Identify the different sources of capital used by the company, such as equity, debt, and preferred stock. Determine the proportion of each source in the company's capital structure. This can be done by dividing the value of each source of capital by the total capitalization of the company. CALCULATE THE COST OF EACH SOURCE OF CAPITAL: Determine the cost of each source of capital. For equity, this is typically the cost of equity, which can be calculated using the Capital Asset Pricing Model (CAPM) or other methods. For debt, it is the cost of debt, which is the interest rate paid on the company's debt obligations. The cost of preferred stock can be calculated similarly. WEIGHT EACH COST OF CAPITAL BY ITS PROPORTION IN THE CAPITAL STRUCTURE: Multiply the cost of each source of capital by its proportion in the capital structure. This gives the weighted cost of each source of capital. SUM THE WEIGHTED COSTS OF CAPITAL: Add together the weighted costs of equity, debt, and preferred stock to calculate the weighted average cost of capital. WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt) + (Weight of Preferred Stock * Cost of Preferred Stock) INTERPRET THE RESULTS: The calculated WACC represents the average rate of return that the company must generate on its existing assets to satisfy its creditors, shareholders, and other stakeholders. It is often used as a discount rate for evaluating investment projects and determining the company's overall cost of capital. It's important to note that the calculation of WACC can be complex and may require adjustments for taxes, risk factors, and other considerations specific to the company's circumstances. Additionally, the weights used in the calculation should be based on the market values or book values of the respective sources of capital, depending on the context of the analysis.