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The '''weighted average cost of capital (WACC)''' is the rate that a company is expected to pay on average to all its security holders to finance its assets. | |||
The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. Companies raise money from a number of sources: [[common equity]], [[preferred stock]], straight [[debt]], [[Convertible bond|convertible debt]], [[Exchangeable bond|exchangeable debt]], [[Warrant (finance)|warrants]], [[Option (finance)|options]], [[Pension|pension liabilities]], [[executive stock option]]s, governmental subsidies, and so on. Different securities, which represent different sources of finance, are expected to generate different returns. The WACC is calculated taking into account the relative weights of each component of the [[capital structure]]. The more complex the company's capital structure, the more laborious it is to calculate the WACC. | |||
Companies can use WACC to see if the investment projects available to them are worthwhile to undertake.<ref>{{cite book | author=G. Bennet Stewart III | title = The Quest for Value | publisher = HarperCollins | year = 1991}}</ref> | |||
==Calculation== | |||
In general, the WACC can be calculated with the following formula:<ref>{{cite journal |first1=James A. |last1=Miles |first2= John R. |last2=Ezzell |title=The weighted average cost of capital, perfect capital markets and project life: a clarification |journal=Journal of Financial and Quantitative Analysis |volume=15 |number=3 |date=September 1980 |pages=719–730}}</ref> | |||
<math>\text{WACC} = \frac{\sum_{i=1}^N r_i \cdot MV_i }{\sum_{i=1}^N MV_i}</math> | |||
where <math>N</math> is the number of sources of capital (securities, types of liabilities); <math>r_i</math> is the required rate of return for security <math>i</math>; and <math>MV_i</math> is the market value of all outstanding securities <math>i</math>. | |||
In the case where the company is financed with only equity and debt, the average cost of capital is computed as follows: | |||
<math>\text{WACC} = \frac{D}{D+E}K_d + \frac{E}{D+E}K_e</math> | |||
where D is the total debt, E is the total shareholder’s equity, Ke is the cost of equity, and Kd is the cost of debt. | |||
===Tax effects=== | |||
Tax effects can be incorporated into this formula. For example, the WACC for a company financed by one type of shares with the total market value of <math>MV_e</math> and cost of equity <math>R_e</math> and one type of bonds with the total market value of <math>MV_d</math> and cost of debt <math>R_d</math>, in a country with corporate tax rate <math>t</math>, is calculated as: | |||
<math>\text{WACC} = \frac{MV_e}{MV_d+MV_e} \cdot R_e + \frac{MV_d}{MV_d+MV_e} \cdot R_d \cdot (1-t)</math> | |||
Actually carrying out this calculation has a problem. There are many plausible proxies for each element. As a result, a fairly wide range of values for the WACC for a given firm in a given year, may appear defensible.<ref>{{cite journal |first1=Murray |last1=Frank |first2= Tao |last2=Shen |title=Investment, Q, and the Weighted Average Cost of Capital |journal= http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2014367 |year=2012 }}</ref> | |||
==See also== | |||
*[[Beta coefficient]] | |||
*[[Cost of capital]] | |||
*[[Discounted cash flow]] | |||
*[[Economic Value Added]] | |||
*[[Internal rate of return]] | |||
*[[Minimum acceptable rate of return]] | |||
*[[Modigliani-Miller theorem]] | |||
*[[Net present value]] | |||
*[[Opportunity cost]] | |||
==References== | |||
{{Reflist}} | |||
==External links== | |||
* [http://www.wacc.de/index.htm#Example Video about practical application of the WACC approach] | |||
* {{cite web |last1=Frank |first1=Murray |last2=Shen |first2=Tao |title=Investment, Q, and the Weighted Average Cost of Capital |date= 2012 |url=http://ssrn.com/abstract=2014367 |publisher=SSRN}} | |||
* {{cite web |last1=Velez-Pareja |first1=Ignacio |last2=Tham |first2=Joseph |title=A Note on the Weighted Average Cost of Capital WACC: Market Value Calculation and the Solution of Circularity between Value and the Weighted Average Cost of Capital WACC |date=August 7, 2005 |url=http://ssrn.com/abstract=254587 |publisher=SSRN}} | |||
* {{cite web |last=Cheremushkin |first=Sergei Vasilievich |title=How to Avoid Mistakes in Valuation – Comment to 'Consistency in Valuation: A Practical Guide' by Velez-Pareja and Burbano-Perez and Some Pedagogical Notes on Valuation and Costs of Capital |date=December 21, 2009 |url=http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1526681 |publisher=SSRN}} | |||
* [http://www.wacccalculator.com/ WACC calculator] | |||
* [http://www.iese.edu/research/pdfs/DI-0715-E.pdf A more realistic valuation: APV and WACC with constant book leverage ratio] | |||
* [http://formularium.org/?go=96 Calculate the WACC with your own values to understand the equation] | |||
* [http://thatswacc.com Find the WACC of any publicly traded company by entering the firm's stock ticker symbol] | |||
* [http://rdcohen.50megs.com/OCSabstract.htm Paper describing a method for generating the WACC curve when there is default risk – spreadsheet available] | |||
{{Corporate finance and investment banking}} | |||
{{DEFAULTSORT:Weighted Average Cost Of Capital}} | |||
[[Category:Capital (economics)]] | |||
[[Category:Mathematical finance]] |
Revision as of 16:33, 22 November 2013
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.
The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. Companies raise money from a number of sources: common equity, preferred stock, straight debt, convertible debt, exchangeable debt, warrants, options, pension liabilities, executive stock options, governmental subsidies, and so on. Different securities, which represent different sources of finance, are expected to generate different returns. The WACC is calculated taking into account the relative weights of each component of the capital structure. The more complex the company's capital structure, the more laborious it is to calculate the WACC.
Companies can use WACC to see if the investment projects available to them are worthwhile to undertake.[1]
Calculation
In general, the WACC can be calculated with the following formula:[2]
where is the number of sources of capital (securities, types of liabilities); is the required rate of return for security ; and is the market value of all outstanding securities .
In the case where the company is financed with only equity and debt, the average cost of capital is computed as follows:
where D is the total debt, E is the total shareholder’s equity, Ke is the cost of equity, and Kd is the cost of debt.
Tax effects
Tax effects can be incorporated into this formula. For example, the WACC for a company financed by one type of shares with the total market value of and cost of equity and one type of bonds with the total market value of and cost of debt , in a country with corporate tax rate , is calculated as:
Actually carrying out this calculation has a problem. There are many plausible proxies for each element. As a result, a fairly wide range of values for the WACC for a given firm in a given year, may appear defensible.[3]
See also
- Beta coefficient
- Cost of capital
- Discounted cash flow
- Economic Value Added
- Internal rate of return
- Minimum acceptable rate of return
- Modigliani-Miller theorem
- Net present value
- Opportunity cost
References
43 year old Petroleum Engineer Harry from Deep River, usually spends time with hobbies and interests like renting movies, property developers in singapore new condominium and vehicle racing. Constantly enjoys going to destinations like Camino Real de Tierra Adentro.
External links
- Video about practical application of the WACC approach
- Template:Cite web
- Template:Cite web
- Template:Cite web
- WACC calculator
- A more realistic valuation: APV and WACC with constant book leverage ratio
- Calculate the WACC with your own values to understand the equation
- Find the WACC of any publicly traded company by entering the firm's stock ticker symbol
- Paper describing a method for generating the WACC curve when there is default risk – spreadsheet available
Template:Corporate finance and investment banking
- ↑ 20 year-old Real Estate Agent Rusty from Saint-Paul, has hobbies and interests which includes monopoly, property developers in singapore and poker. Will soon undertake a contiki trip that may include going to the Lower Valley of the Omo.
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The data offered is for normal info purposes only and isn't supposed to be personalised investment or monetary advice. Motley Fool Singapore contributor Stanley Lim would not personal shares in any corporations talked about. Singapore private home costs increased by 1.eight% within the fourth quarter of 2012, up from 0.6% within the earlier quarter. Resale prices of government-built HDB residences which are usually bought by Singaporeans, elevated by 2.5%, quarter on quarter, the quickest acquire in five quarters. And industrial property, prices are actually double the levels of three years ago. No withholding tax in the event you sell your property. All your local information regarding vital HDB policies, condominium launches, land growth, commercial property and more
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In its statement, the singapore property listing - website link, government claimed that the majority citizens buying their first residence won't be hurt by the new measures. Some concessions can even be prolonged to chose teams of consumers, similar to married couples with a minimum of one Singaporean partner who are purchasing their second property so long as they intend to promote their first residential property. Lower the LTV limit on housing loans granted by monetary establishments regulated by MAS from 70% to 60% for property purchasers who are individuals with a number of outstanding housing loans on the time of the brand new housing purchase. Singapore Property Measures - 30 August 2010 The most popular seek for the number of bedrooms in Singapore is 4, followed by 2 and three. Lush Acres EC @ Sengkang
Discover out more about real estate funding in the area, together with info on international funding incentives and property possession. Many Singaporeans have been investing in property across the causeway in recent years, attracted by comparatively low prices. However, those who need to exit their investments quickly are likely to face significant challenges when trying to sell their property – and could finally be stuck with a property they can't sell. Career improvement programmes, in-house valuation, auctions and administrative help, venture advertising and marketing, skilled talks and traisning are continuously planned for the sales associates to help them obtain better outcomes for his or her shoppers while at Knight Frank Singapore. No change Present Rules
Extending the tax exemption would help. The exemption, which may be as a lot as $2 million per family, covers individuals who negotiate a principal reduction on their existing mortgage, sell their house short (i.e., for lower than the excellent loans), or take part in a foreclosure course of. An extension of theexemption would seem like a common-sense means to assist stabilize the housing market, but the political turmoil around the fiscal-cliff negotiations means widespread sense could not win out. Home Minority Chief Nancy Pelosi (D-Calif.) believes that the mortgage relief provision will be on the table during the grand-cut price talks, in response to communications director Nadeam Elshami. Buying or promoting of blue mild bulbs is unlawful.
A vendor's stamp duty has been launched on industrial property for the primary time, at rates ranging from 5 per cent to 15 per cent. The Authorities might be trying to reassure the market that they aren't in opposition to foreigners and PRs investing in Singapore's property market. They imposed these measures because of extenuating components available in the market." The sale of new dual-key EC models will even be restricted to multi-generational households only. The models have two separate entrances, permitting grandparents, for example, to dwell separately. The vendor's stamp obligation takes effect right this moment and applies to industrial property and plots which might be offered inside three years of the date of buy. JLL named Best Performing Property Brand for second year running
The data offered is for normal info purposes only and isn't supposed to be personalised investment or monetary advice. Motley Fool Singapore contributor Stanley Lim would not personal shares in any corporations talked about. Singapore private home costs increased by 1.eight% within the fourth quarter of 2012, up from 0.6% within the earlier quarter. Resale prices of government-built HDB residences which are usually bought by Singaporeans, elevated by 2.5%, quarter on quarter, the quickest acquire in five quarters. And industrial property, prices are actually double the levels of three years ago. No withholding tax in the event you sell your property. All your local information regarding vital HDB policies, condominium launches, land growth, commercial property and more
There are various methods to go about discovering the precise property. Some local newspapers (together with the Straits Instances ) have categorised property sections and many local property brokers have websites. Now there are some specifics to consider when buying a 'new launch' rental. Intended use of the unit Every sale begins with 10 p.c low cost for finish of season sale; changes to 20 % discount storewide; follows by additional reduction of fiftyand ends with last discount of 70 % or extra. Typically there is even a warehouse sale or transferring out sale with huge mark-down of costs for stock clearance. Deborah Regulation from Expat Realtor shares her property market update, plus prime rental residences and houses at the moment available to lease Esparina EC @ Sengkang