I'm currently doing research and analytics on a company and am having difficulty calculating WACC and long term debt. Is there more than one way to calculate WACC? If so, what options are there? Any suggestions on computations or helpful explanations?
Date: 08 Apr 2010 03:16
Number of posts: 3
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Hello B Berry.
There are lots of ways to calculate the WACC. Don't forget, it's simple the weight average cost of capital. So find the cost of debt and the cost of equity and weigh the two per your capital structure. You can use our company-specific WACC calculations to help guide you, but those calculations are very involved and are sometimes very complicated. You can make a few assumptions that help:
1. The cost of debt is simply how much a bank is willing to lend a company. Find the company's interest payments and divide that number by their total interest bearing debt. You can average it over a period of time and / or take an average of their peers to smooth out any issues. You can also look up the companies debt rating (e.g. BBB, AAA, CCC+) and find the cost of debt on a yield curve. Make sure you find the cost for corporate debt versus treasury debt, which is of high quality and lower interest payments.
2. Long term debt is found on the balance sheet under liabilities. Sometimes it's not clear, so you will have to read the notes per line item to understand the information better. For the WACC calculation you will need total debt, which is LT plus ST debt capital.
I hope this helps,
Thank you, that was very insightful, I needed this information. I know how to calculate WACC for my business but I wasn't sure that my procedure is the best, you just confirmed it to me. I am about to subscribe it in a local business directory so I need need to be aware of all the numbers to be able to have a clear view on it.