Wacc Beginner
The Cost of Capital Project: Internet Version {December 2009}
By
Wm R McDaniel, PhD
Objective
The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting datum to estimate the discount rate to use in the net present value analysis of new projects or of termination decisions. The student will later need to know the technique for application in some case study solutions. The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources, and in working around naturally occurring measurement errors.
The Primary Equations
The theory of why managers should use WACC in net present value analysis comes later in the course. For now, start with the equations for WACC, per se:
ka = ke(E/V) + kd(1 – t)(B/V) + kp(P/V) + kL(L/V) [1]
V = E + B + P + L [2]
The symbol, ka, is the same as WACC. V is the total market value of the corporation. The identities of all other symbols are in the paragraphs below. Note from the beginning that all variables are estimates of market values – these are not the same as accounting book values nor the coupon rates, except under extraordinary circumstances.[1]
I. Format
1. An important feature of your submission is your list of assumptions. 2. Your report will have no extended textual part; i.e., no long paragraphs. 3. Your report must include four or five pages of documentation. These will be copies of data sources with yellow (or pick you favorite color) highlighting of the datum you used. Handing in 50 pages of documentation can only hurt your professor’s sore elbow and
By
Wm R McDaniel, PhD
Objective
The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting datum to estimate the discount rate to use in the net present value analysis of new projects or of termination decisions. The student will later need to know the technique for application in some case study solutions. The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources, and in working around naturally occurring measurement errors.
The Primary Equations
The theory of why managers should use WACC in net present value analysis comes later in the course. For now, start with the equations for WACC, per se:
ka = ke(E/V) + kd(1 – t)(B/V) + kp(P/V) + kL(L/V) [1]
V = E + B + P + L [2]
The symbol, ka, is the same as WACC. V is the total market value of the corporation. The identities of all other symbols are in the paragraphs below. Note from the beginning that all variables are estimates of market values – these are not the same as accounting book values nor the coupon rates, except under extraordinary circumstances.[1]
I. Format
1. An important feature of your submission is your list of assumptions. 2. Your report will have no extended textual part; i.e., no long paragraphs. 3. Your report must include four or five pages of documentation. These will be copies of data sources with yellow (or pick you favorite color) highlighting of the datum you used. Handing in 50 pages of documentation can only hurt your professor’s sore elbow and