Weighted Average Cost Of Capital

The Weighted Average Cost of Capital

(WACC) is the aggregate of Cost of Debt
(COD) and Cost of Equity (COE). It is the
correct rate to use in Valuation Techniques as
it is the Company's Cost of Capital and
therefore will give a more fair value than
when any other approximate rate is used.
Weighted Average Cost Of Capital
Computation…….

WACC = x * COD + y * COE where

COD = Gross Interest % - Tax Benefit on Gross Interest

and

COE = Risk Free Rate + Specific Risk Premium

and

x & y are the proportions of debt and equity to the total

capital respectively
Weighted Average Cost Of Capital
Illustration…..
Cost of Debt
The gross interest rate is 9 and the Corporate Tax rate is 30%
Therefore the COD is = 9% - (30% of 9%) =6.3%
Cost of Equity
See computation of 16.54% in slides on “Cost of Equity”
Assuming that Equity=Rs 500 crs, Reserves = Rs7500crs & Debt = Rs4000 crs
the total capital employed is Rs 12000 crs with Net Worth having a weightage of
2/3 and Debt of 1/3 to it.
WACC = COD + COE after considering Debt/Equity weightage

Therefore WACC =( 1/3*6.3) + (2/3*16.54)=13.12% rounded off to 13%

Weighted Average Cost Of Capital

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