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    Part 2_WACC

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    agnesskuthea85
    WACC calculation using Excel

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    Part 2_WACC

    Uploaded by

    agnesskuthea85
    1 views12 pages
    WACC calculation using Excel

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    © © All Rights Reserved

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    XLSX, PDF, TXT or read online from Scribd

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    WACC calculation using Excel

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    1 views12 pages

    Part 2_WACC

    Uploaded by

    agnesskuthea85
    WACC calculation using Excel

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 12

    DH

    Weighted Average Cost of Capital (WACC) Template

    Symbol Meaning
    Debt
    D Total debt
    rD Cost of debt

    Equity
    E Equity
    rF Risk-free rate
    β CAPM Beta

    MRP Market risk premium


    rE Cost of equity

    Cost of Capital
    D/(D+E) Debt proportion
    E/(D+E) Equity proportion
    WACC Cost of capital

    Notes: ● Bond yield

    ● Equity = Market / Book Ratio × Book value of Equity.

    ● CAPM Beta

    ● D/(D+E) = Total Debt / (Total Debt + Market Adjusted Equity)

    Question (1): What does this WACC mean?


    The 6.27% WACC is the average rate of return that DH needs to generate on its overall capital (both debt
    and equity) to satisfy the expectations of its investors and creditors. It is used as a discount rate in
    financial valuation models to assess the present value of future cash flows.

    Question (3): Should management use an entity’s estimated weighted average cost of capital to determine whether to p

    While the WACC is a useful tool for estimating the cost of capital and discounting cash flows, it is not a
    one-size-fits-all solution. Management should carefully consider the specific characteristics of each
    project and may need to adjust the discount rate to reflect the unique risks and financing arrangements
    associated with the project.
    Capital (WACC) Template

    Description/Guidance Value

    Long-term debt + Short-term debt + Current portion of long-term debt 432,648.00


    Bond yield 6.50%

    E is market-adjusted value of book value of equity 291,236.00


    Risk-free rate given by Long-term T-bond yield 4.50%
    Coefficient of the relation between the entity's required rate of return and the
    premium of the market portfolio 1.00
    Market return − Risk-free rate 5.00%
    rF + ß × MRP 9.50%

    Portion of debt in capital structure 0.60


    Portion of equity in capital structure 0.40
    [E/(D+E)] × rE + [D/(D+E)] × [rD × (1− Tax rate)] 6.27%

    Use the observed bond yield or calculate the yield as (rF + interest rate spread
    over 10-year treasury bond).
    The average interest rate can be used as an approximation of the entity's
    current expected cost of debt when the entity's debt is not publicly traded.
    Average interest rate = Interest expense /[(Beginning Balance of Total debt +
    Ending Balance of Total debt) /2) .

    rket / Book Ratio × Book value of Equity.


    This Market-Book value adjustment is needed to approximate the market
    value of equity as equity is determined, in part, using historical cost
    measurements.

    Market-Book Ratio is either: the Market / Book ratio for the entity if it is
    publicly traded, or the average of the ratio for comparable publicly traded
    entities if the entity is a not-for-profit entity. See Exhibit 5.

    β is either: the β for the entity if it is publicly traded, or the average β for
    comparable publicly traded entities if the entity is a not-for-profit entity. See
    Exhibit 5. (For simplicity, take the arithmetic average and do not adjust for
    differences in leverage between the entities.)
    otal Debt / (Total Debt + Market Adjusted Equity)

    his WACC mean?


    ACC is the average rate of return that DH needs to generate on its overall capital (both debt
    ) to satisfy the expectations of its investors and creditors. It is used as a discount rate in
    financial valuation models to assess the present value of future cash flows.

    agement use an entity’s estimated weighted average cost of capital to determine whether to proceed with every project?

    CC is a useful tool for estimating the cost of capital and discounting cash flows, it is not a
    ll solution. Management should carefully consider the specific characteristics of each
    ay need to adjust the discount rate to reflect the unique risks and financing arrangements
    h the project.
    Tax Rate 37%

    DH WACC
    D Total debt 432648
    rD Cost of debt 6.50%
    E Equity 291236
    rF Risk-free rate 4.50%
    β CAPM Beta
    1
    MRP Market risk premium 5.00%
    rE Cost of equity 9.50%
    D/(D+E) Debt proportion 0.5977
    E/(D+E) Equity proportion 0.4023
    WACC Cost of capital 6.27%
    every project?
    CHS
    Weighted Average Cost of Capital (WACC) Template

    Symbol Meaning
    Debt
    D Total debt
    rD Cost of debt

    Equity
    E Equity
    rF Risk-free rate
    β CAPM Beta

    MRP Market risk premium


    rE Cost of equity

    Cost of Capital
    D/(D+E) Debt proportion
    E/(D+E) Equity proportion
    WACC Cost of capital

    Notes: ● Bond yield

    ● Equity = Market / Book Ratio × Book value of Equity.

    ● CAPM Beta

    ● D/(D+E) = Total Debt / (Total Debt + Market Adjusted Equity)

    Question (2): What does this WACC mean?


    This means that, on average, CHS is expected to pay a return of 6.37% to its investors for financing its
    operations and investments. In other words, the 6.37% WACC is the average rate of return that the
    company needs to generate on its overall capital (both debt and equity) to satisfy the expectations of its
    investors and creditors.

    Question (3): Should management use an entity’s estimated weighted average cost of capital to determine whether to p
    Same response as for DH.
    Capital (WACC) Template

    Description/Guidance Value

    Long-term debt + Short-term debt + Current portion of long-term debt 8,871,521.00


    Bond yield 7.50%

    E is market-adjusted value of book value of equity 2,637,849.00


    Risk-free rate given by Long-term T-bond yield 4.50%
    Coefficient of the relation between the entity's required rate of return and the 1.48
    premium of the market portfolio
    Market return − Risk-free rate 5.00%
    rF + ß × MRP 11.90%

    Portion of debt in capital structure 0.7708


    Portion of equity in capital structure 0.2292
    [E/(D+E)] × rE + [D/(D+E)] × [rD × (1− Tax rate)] 6.37%

    Use the observed bond yield or calculate the yield as (rF + interest rate spread
    over 10-year treasury bond).
    The average interest rate can be used as an approximation of the entity's
    current expected cost of debt when the entity's debt is not publicly traded.
    Average interest rate = Interest expense /[(Beginning Balance of Total debt +
    Ending Balance of Total debt) /2) .

    rket / Book Ratio × Book value of Equity.


    This Market-Book value adjustment is needed to approximate the market
    value of equity as equity is determined, in part, using historical cost
    measurements.

    Market-Book Ratio is either: the Market / Book ratio for the entity if it is
    publicly traded, or the average of the ratio for comparable publicly traded
    entities if the entity is a not-for-profit entity. See Exhibit 5.

    β is either: the β for the entity if it is publicly traded, or the average β for
    comparable publicly traded entities if the entity is a not-for-profit entity. See
    Exhibit 5. (For simplicity, take the arithmetic average and do not adjust for
    differences in leverage between the entities.)
    otal Debt / (Total Debt + Market Adjusted Equity)

    his WACC mean?


    at, on average, CHS is expected to pay a return of 6.37% to its investors for financing its
    d investments. In other words, the 6.37% WACC is the average rate of return that the
    ds to generate on its overall capital (both debt and equity) to satisfy the expectations of its
    creditors.

    agement use an entity’s estimated weighted average cost of capital to determine whether to proceed with every project?
    e as for DH.
    Tax Rate 37%

    CHS WACC
    D Total debt 8871521
    rD Cost of debt 7.50%
    E Equity 2637849

    rF Risk-free rate 4.50%


    β CAPM Beta 1.48
    MRP Market risk premium 5.00%
    rE Cost of equity 11.90%
    D/(D+E) Debt proportion 0.7708
    E/(D+E) Equity proportion 0.2292
    WACC Cost of capital 6.37%
    every project?

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