Reading: WACC for Listed Firms
So far, we have seen what the WACC is and how we use it in firm valuation. This section takes a brief look at how to estimate the WACC in practice.
4. Putting Everything Together
To conclude, let's now compute the WACC of a hypothetical company. Suppose we have collected the relevant information in the following table:
|
Variable |
Description |
Estimate |
|
E/(D+E) |
Equity ratio |
60% |
|
β |
Beta of the stock |
1.2 |
|
MRP |
Market risk premium |
6.5% |
|
RF |
Risk-free rate of return |
2.0% |
|
CS |
Credit spread of the debt |
3.0% |
|
τC |
Marginal tax rate |
25% |
|
D/(D+E) |
Debt ratio |
40% |
Based on this information, we can estimate the firm's WACC. The following figure illustrates the procedure step-by-step. According to our estimates, the WACC is 7.38%.
In the following chapter, we discuss the relevant steps to estimate the WACC of a company if there is important information missing about the company or if the company decides to adjust its capital structure.