Report on the WACC for Fiat motors
The WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond, the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market, a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in that market. A beta greater than 1 indicates that the firm is more heavily exposed to market factors than the average firm in that market. The formula I will be using to calculate the cost of equity is the CAP-M formula and is as follows; KE = RF + B (RM – RF)
RF = Risk free rate, B = Firm’s Beta, RM = Return on the market The cost of debt or KD is calculated by finding the internal rate of return for all the firms bonds. First the coupon on the bond is found for each of the remaining years until maturity, then we deduct tax, finally we choose test two discount factors and put our findings into the following formula; IRR = DCF1 + (DCF2 – DCF1) * NPV1 – 0 / NPV1 - NPV2
Once we have found our KE and KD we must find the weights of both the equity and debt capital. Finally all of this information is entered into our WACC formula which is as follows where MV is is the market value of the company; WACC = (KE * MV of equity / MV of company) + (KD * MV of debt / MV of company)
Cost of Debt
Fiat motors have one bond to the value of $1394.8 billion with a coupon rate of 5.625%, the price of the bond is $78.8 and the maturity date is 06/12/2017. The discount factors I will be using are 3% and 10%.
Year| Cash Flow| CF after tax| DF2| PV2| DF1| PV1|
0| -$79.50| 31.4%| 3%| -$79.50| 10%| -$79.50|
1| 5.625| 3.859| .9709| 3.7459| .9091| 3.5082|
2| 5.625| 3.859|...