How to Solve for Wacc

Topics: Stock market, Interest, Capital asset pricing model Pages: 2 (383 words) Published: February 18, 2013
1.How exactly does this That's WACC calculate WACC?:
When you enter a ticker symbol, That's WACC retreives the following information about the company: oFrom the BALANCE SHEET (last 3 years data, if available)
Short Term Debt (and current portion of long-term debt)
Long Term Debt
oFrom the INCOME STATEMENT (last 3 years data, if available) Interest Expense
Income Before Tax
Income Tax Expense
oOther Data
The firm's Market Capitalization (intraday stock price x shares outstanding) The firm's Beta (β)
An estimate of the Risk-free borrowing rate (currently we assume 3%) An estimate of the Market risk premium (currently we assume 11%)

Using the data from the sources above, we calculate the components of the WACC equation as follows:

For rD, the firm's return on Debt:
From the INCOME STATEMENT, we know the interest paid for the most recent fiscal year. Then from the BALANCE SHEET we add the (short and long-term) debt for the TWO prior years. Dividing this figure by 2 gives a rough 'average' for the debt outstanding for the prior fiscal year. Finally, by dividing the INTEREST EXPENSE by the AVERAGE DEBT, we arrive at an estimate for rD

For Tc, the firm's corporate tax rate:
From the INCOME STATEMENT, we add the prior 3 year's "Income Tax Expense", and divide this by the prior 3 year's "Income Before Tax".

For D, the firm's Total Debt; E, the firm's Market Capitalization, and for V, the firm's "Enterprise Value": Total Debt, D, is calculated as the short-term + long-term debt listed on the BALANCE SHEET. The firm's Market Cap is based on the intraday stock price of the firm at the time the query was run. The firm's "Enterprise Value" is simply defined as TOTAL DEBT + MARKET CAP, or D + V

For rE, the firm's cost of equity:
To quote our own "WACC Formula" page, the firm's cost of equity is best (or, at least, most easily) calculated using the CAPM (Capital Asset Pricing Model), which states: Cost of Equity rE = rf + β(rM...
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