computingWACC: Calculates Weighted Average Cost of Capital(WACC).

In stockAnalyst: Equity Valuation using Methods of Fundamental Analysis

Calculates Weighted Average Cost of Capital(WACC).

Description

The overall required rate of return of a suppliers of capital is usually referred to as cost of capital. The cost of capital is most commonly estimated using the after-tax weighted average cost of capital, or weighted average cost of capital (WACC) for short; a weighted average of required rates of return for the component sources of capital.It is interesting fact to note that in many jurisdictions, corporations may deduct net interest expense from income in calculating taxes owed, but they cannot deduct payments to shareholders, such as dividends. Because capital structure (the proportions of debt and equity financing) can change over time, WACC may also change over time. In addition, the company’s current capital structure may also differ substantially from what it will be in future years. For these reasons, analysts often use target weights instead of the current market-value weights when calculating WACC (Jerald E. Pinto, 2020)

Usage

computingWACC(dollarValDebt, dollarValCEquity, rDebt, rCEquity, taxRate)

Arguments

dollarValDebt	A number.
dollarValCEquity	A number.
rDebt	A number.
rCEquity	A number.
taxRate	A number.

Details

Based on the information provided by Jerald E. Pinto (2020), the method computingWACC is developed for computing Weighted Average Cost of Capital(WACC) for the values passed to its five arguments. Here, dollarValDebt is dollar value of the debt, dollarValCEquity is dollar value of the common equity, rDebt before-tax required return on debt,rCEquity is required return on equity, and taxRate is corporate tax rate.

Value

Input values to five arguments dollarValDebt , dollarValCEquity, rDebt, rCEquity, and taxRate.

Author(s)

MaheshP Kumar, [e-mail]

References

Pinto, J. E. (2020). Equity Asset Valuation (4th ed.). Wiley Professional Development (P&T). https://bookshelf.vitalsource.com/books/9781119628194

Examples

computingWACC(dollarValDebt=35,dollarValCEquity=65,rDebt=0.056,rCEquity=0.127,taxRate=0.29)

stockAnalyst documentation built on Sept. 13, 2022, 5:07 p.m.