Weighted Average Cost of Capital

Anything in P5 on WACC will be very simple (and only in EVA calculations). ‘Proper’ WACC calculations are only in F9 and P4.

You get the cost of equity (which in P5 he will have to give you), and you get the cost of debt borrowing (which again he will have to give you, but if he simply says the rate of interest, then remember that the interest gets tax relief and so the cost to the company is lower. So….if interest is 10% and tax is at 30% then the net cost to the company is 7%).

When you have the cost of equity and the cost of debt, then you take a weighted average, weighting by the total market values of the equity and of the debt.

So…..suppose the cost of equity is 15% and the rate of interest on debt is 10%, and the tax rate is 30%. Also suppose the total market values of the company are 60% from equity and 40% from debt.

Then the cost of debt is 7%, and the WACC is (60% x 15%) + (40% x 7%) = 11.8%

Hope that helps!

You are welcome 🙂