WACC =(E/V)* Re+(D/V)* Rd *( 1-Tc)
Extended data:
First, the abbreviation of WACC English weighted average cost of capital. WACC represents the overall average cost of capital of a company and can be used to measure whether a project is worth investing. The return of this project must not be lower than WACC. When calculating WACC, first calculate the capital cost or required rate of return of each item that constitutes a company's capital structure, such as common stock, preferred stock, corporate bonds and other long-term liabilities, and then weight these rates of return according to the weight of each item in the capital structure to calculate the weighted average cost of capital. Calculation formula = (debt/total capital) * debt cost *( 1- enterprise income tax rate)+(net asset value/total capital) * equity cost. When considering tax, debt cost = interest *( 1- tax rate).
Like interest, WACC is expressed as a percentage. For example, the company uses WACC 12% together, indicating that only investment should be made, and all investments should be made. WACC gives a return higher than 12%.
The capital cost of all investments, for the whole company or a project, is the return rate that capital providers want to accept if they invest their capital elsewhere. In other words, the cost of capital is the type of opportunity cost.
Third, give an example:
The market value of corporate debt is 45 million yuan, the value of preferred stock is 5 million yuan, the market value of common stock is 50 million yuan, and the corporate debt yield is 9.5%. Its preferred shares pay a fixed dividend to 7.5 yuan per share, and are currently priced at 50 yuan per share. The beta value of common stock is 0.9, the market value of corporate debt is 45 million yuan, the value of preferred stock is 5 million yuan, the market value of common stock is 50 million yuan, and the corporate debt yield is 9.5%. Its preferred shares pay a fixed dividend to 7.5 yuan per share, and are currently priced at 50 yuan per share. The beta of the company's common stock is 0.9, the risk-free interest rate is 4%, and the market risk premium is 9.5%. Considering that the company faces 30% tax, calculate the weighted average cost of capital of the company. WACC。
First, to calculate WACC, you need to use the formula:
WACC = Rd * Xd *( 1-Tc)+Rps * Xps+Re * Xe
Among them, Rd, Rps, re-debt cost, preferred stock cost and equity cost (common stock cost); Xd, Xps, XE-proportion of creditor's rights, proportion of preferred stock and proportion of equity, for example: XD = (D)/(D+PS+E); TC- corporate tax rate.
Second, the following begins to calculate the cost of creditor's rights, preferred shares and equity.
1, in which the debt cost (Rd) and the preferred stock cost (Rps) are generally calculated directly by the bank loan interest rate or the preferred stock/bond yield to maturity.
That is Rd=9.5%
Then we should understand that preferred shares are equivalent to permanent rights, and its holders will always get fixed income. So its cost is equal to the dividend per period divided by the share price per share.
That is Rps=7.5/50= 15%.
2. CAPM calculation model is needed to calculate the equity cost.
The calculation formula of this model is:
Rei = Rf + MRP * Beta
Where RF is the risk-free interest rate; MRP- market (risk) premium; Beta-the beta coefficient of the company.
Bring into the formula, get
Re = 4% + 9.5% * 0.9 = 12.55%
3. Finally, bring the obtained data into WACC formula.
OK,
WACC = 0.095 *( 1-0.3)*(4500/(4500+500+5000))+0. 15 *(500/(4500+500+5000))+0. 1255 *(5000/(4500+500+5000))= 0. 10 = 10