Folks -
I am doing some analysis for several companies to answer the question – “The stock-price of a company is reflection of its current and future value component. For a given company, what is breakdown of the current and future value components. For example, GOOG stock price reflects 10% current value and 90% future value”.
To do this calculation, I need to know WACC (http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital) for each company.
Is there a source (like Rueters) where I can get WACC for any public company? Or, if I use the formula mentioned in the wikipedia entry – then what items do I look at each company’s income statement/balance sheet to calculate WACC?
Any help appreciated.
csanda
June 9, 2010 at 4:15 am
WACC = Weighted avg. cost of capital
WACC = W(e)*K(e) + W(d)*K(d)
W = market weight, e = equity, d = debt
You know the market cap and you can get a good idea of the market value of the debt, either by looking at the value off of Bloomberg or by calculating it yourself after coming up with an estimate of a fair discount rate for the debt. If you’re too lazy to calculate the value of debt, then you use book value because debt value is usually not that far off from book.
K(e) is obtained through CAPM theorum.
CAPM = K(e) = [R(f)+ Beta* (Rm-Rf)]
Beta can be derived off of Yahoo, Reuters or Bloomberg (but it is usually wrong and I recalculate the number by hand using a manual regression of daily values versus the S&P 500). R(r) is the long-term risk free rate. Some people use the YTM for a 30 year T-bond, others use a fixed number like 7% as a proxy for average 30-year T-bond rate given infinite amount of time. R(m) is the market return of stocks. Many people use 11%, as it is the often quoted return of stock since the beginning of the US market’s history. The study hasn’t been updated, but this is a good start.
K(d) = cost of debt. This is the effective yield on their debt. You can either do a bottoms-up analysis, but taking their interest expense and dividing it by the average balance of debt outstanding. Or you can do a top down analysis, which is to eye-ball what interest they should be paying based on their credit rating. For example, you wouldn’t be too far off if you said 6%. This is tax adjusted and you usually use a statutory tax rate. US corporations, like individuals pay on a sliding tax scale. 35% is the top rate, but you can use something like 25% as something more realistic. Others use the effective tax rate as a proxy (ie, last fiscal period tax expense divided by the PBT).