First of all, I would like to thank you for your great work. I have a question on WACC, actually how to use it in practice, please help and tell me if it is a right or wrong way I think. I have to make a forecast for a company and I don’t know at which rate to discount it, because there are not statistic rates for Beta and Risk free rate and so on. Without this factors, I tried to calculate it based on Balance sheet. For instace, if a company has 6,000$ Equity and 4,000 12% debt, total 10,000$; At the end of year it received 1,000$ profit, from which 700$ was given as dividend. For WACC calculation purposes, I calculate cost of equity: (6,000/10,000*700)/6,000=0.07=7%. then Cost of Debt assuming 15% is Tax rate :Kd=i(1-Tax rate) /Po=4000*12%(1-0.15)/4000=0,102=10,2%. Assuming that Market value of equity and debt is the same, is it fair that WACC=equity/(equity+debt)*cost of capital+(debt/equity+debt)*cost of debt=6,000/(6,000+4,000)*7%+
4,000/10,000*10.2%= 4.2%+4.08%=8,28% and to discount future forcasted profit at this rate. Again, Thank you for your time.
You have calculated the cost of debt correctly, but I am not sure what you have done in your calculation of cost of equity.
It really depends on the expected growth rate in dividends. If no growth is expected, then the cost of equity would be 700/6000 = 11.7%
However because the company is not distributing all its profits as dividend, it would suggest that there is expected growth. This would make the cost of equity higher by a multiple of 1+g
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