Finance: WACC?

Question

When trying to get the "weight of Equity" where does equity come from, is it from Assets-Liabilities=Equity? How about the "weight of Debt" where does debt come from, is it from Long Term debt only or do you have to include Current Liabilities with it? Please help, I'd appreciate it thank you

Answer 1

WACC is "weighted average cost of capital".

WACC has two variables (actually it can have more, but 99% of the time it's two). The two variables are DEBT and EQUITY.

The weight of capital is the pro-rata of the MARKET VALUE of the DEBT and the MARKET VALUE of EQUITY.

For example, your company has $100 of assets and it is financed $20 with equity and and $80 with debt. The equity is publicly listed and trades at 4x price/book and the debt is private but not distressed and there have been no major changes in interest rates since issuance. The market value of the book (e.g. equity) is 4x$20=$160. The market value of the book remains near par ($80) since the market interest rates have not changes (whereas market value of debt depends upon the prevailing interest rates). The weighting of debt to equity is 33% debt ($80 out of $240) and 66% ($160 out of $240) equity.

The cost of equity is easier. The cost of debt is the interest expense divided by the average market value of debt. Say you paid $8 in interest. The cost of debt (Kd) is 10% ($8/$80). The cost of equity is based upon the CAPM formula: Ke = Beta(Rm) + (Rf), where Rm = market return premium over risk free rate and Rf = risk free rate. If the beta of a stock is 1.5x, Rm = 5% and Rf = 5%, the K3 = 12.5% via 1.5(5%) = 5%.

WACC = Wd*Kd + We*Ke. In this example 33%*10% + 66%*12.5% = 11.55%

Answer 2

WACC is working age cost capital. this can be defined as percentage because it is an interest rate. Once we see the abbreviation, it already tell us that a long term because it is a capital that used to invest or monitoring long-term funds.
weight of equity, of course come from long term capital. and also, weight of debt, it is come from long term liabilities

Answer 3

WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. And CAPM is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. How do we calculate the WACC for a Company?And Capital Asset Pricing Model (Part 1). Check out the links to understand better. They have used good examples. https://bluebookacademy.com/

Answer 4

Others have already answered the very basic also detailed info. Thanks a lot. However, maybe you could try a few online courses as well for a clear picture. Did you guys try Bluebook Academy?