WACC(MARKET VALUE)

1. WEIGHTED AVERAGE COST OF
CAPITAL (MARKET VALUE)

2. WACC
• Weighted Average Cost of Capital (WACC) is
defined as the weighted average of cost of each
component of capital (equity, debt, preference
shares etc) where the weights used are target
capital structure.
• It is assumed that the primary purpose of
WACC is to evaluate new projects.

3. DIFFERENT TYPES OF WEIGHTS

4. MARGINAL WEIGHTS VS. HISTORICAL
WEIGHTS
• MARGINAL WEIGHTS
These are the proportion of capital in which the
fresh capital for the new project is raised.
• HISTORICAL WEIGHTS
These are the proportion of actual existing
capital structure in terms of book value or
market value.

5. BOOK VALUE V/S MARKET VALUE
• Book value WACC is calculated using book value
weights.
• The market value WACC is calculated using the
market value of the sources of capital.
• Market value weights are preferred over book
value weights.

6. Why the market value weights are
preferred over book value weights?
• The book value weights are readily available from
balance sheet for all types of firms and very simple
to calculate.
• On the other hand, for market value weights, the
market values have to be determined and it is a real
difficult task to acquire accurate data for the same
especially the value of equity.
• Still market value WACC is considered appropriate
by analysts because an investor would demand
market required rate of return on the market value
of the capital and not the book value of the capital.

7. Calculation of WACC
• To calculate WACC, multiply the cost of each
capital component by its proportional weight
and take the sum of the results.
• The method for calculating WACC can be
expressed in the following formula:

8. Formula
WACC = We Ke + Wp Kp + Wd kd (1 - t)
Where:
We = Proportion of Equity
Wp = Proportion of Preference
Wd = Proportion Debt
Ke = Cost of equity capital
Kp = Cost of preference capital
Kd = Cost of debt
t = Tax rate

9. Example
• Suppose the stock price is ₹50 (market vale),
there are 14%, 3 million shares of stock,
the firm has 9%, 25 million of preferred
stock, and 10%, 75 million of debt. The
corporate tax rate is 40%.

10. Given,
• Ke = ₹50 (3 million) = ₹150 million
• Kp = ₹25 million
• Kd = ₹75 million
• Total value V = ₹150 + ₹25 + ₹75 = ₹250
million
• We = ₹150/₹250 = 0.6
• Wp = ₹25/₹250 = 0.1
• Wd = ₹75/₹250 = 0.3

11. Calculating WACC
WACC = We Ke + Wp Kp + Wd kd (1 - t)
= 0.6(14%) + 0.1(9%) + 0.3(10%)(0.6)
= 8.4% + 0.9% + 1.8%
= 11.1%.

12. WACC estimations for some large
corporations
company WACC Wd
Intel 16.0 2.0%
Dell computer 12.5 9.1%
Wal-Mart (WMT) 8.8 33.3%
Coca-Cola 6.9 33.8%
Georgia-pacific 5.9 69.9%

13. Thank you