Exercise

Calculating WACC

In addition to determining the proportion of both equity and debt financing, you will need to estimate the cost of financing via both debt and equity in order to estimate your WACC.

The cost of debt financing can be estimated as the amount you will have to pay on a new loan. This can be estimated by looking at the interest rates of loans of similar sizes to similar companies, or could be based on previous loans your company may already have been issued.

The cost of equity financing can be estimated as the return on equity of similar companies. Calculating the return on equity is a simple accounting exercise, but all you need to know is that essentially, investors will require a rate of return that is close to what could be earned by a similar investment.

Instructions

100 XP
  • Assume a cost of equity of 18% based on similar companies.
  • The bank is willing to lend at an interest rate of 12%.
  • Assume a corporate tax rate of 35% and that your debt financing is tax-deductible.
  • Calculate and print your company's WACC.