WACC is an indicator of the cost of capital. Cost of Capital WACC: Examples and Calculation Formula

Modern market economy contributes to the formation of the value of the property of any organization. This indicator is created under the influence of various cash flows. In the course of its activities, the company applies its own and borrowed capital. All these cash flows flow into the funds of the organization, form its assets.

WACC is an indicator of the cost of each separate source of financing the company's activities. This ensures the normal execution of the technological cycles. Controlling the cost of capital sources allows you to increase profits. Therefore, this important factor is necessarily considered by analysts. The essence of the presented method will be considered below.

General information

, который впервые начал рассматриваться аналитиками в середине прошлого столетия. Weighted average cost of capital (WACC) is an indicator that was first considered by analysts in the middle of the last century. He was brought into use by such well-known economists as Miller and Modigliani. They proposed to consider the weighted average cost of capital. This indicator is determined to this day as the price of each share of the organization's funds.

To assess each source of funding, it is discounted. In this way, the level of profitability is calculated, and then the profitability of the business. At the same time, the minimum amount of payment to the investor is determined for the use of its financial resources in the course of the organization's activities.

омпании определяется при оценке структуры капитала. The scope of application of the WACC indicator to the company is determined when assessing the capital structure. Its cost is not the same for each category. That is why the price of each source of financing is determined separately. Yield is also calculated for each separate category of capital. The difference between these indicators and the costs of attracting them allows you to determine the amount of cash flow. The result is discounted.

Financial sources

которой будут представлены далее, требует вникнуть в организацию финансирования деятельности компании. The cost of capital WACC, examples and formulas for calculating which will be presented below, requires insight into the organization of financing the company's activities. Property that is managed by the organization is presented in the active side of the balance sheet. The funds that formed these funds (raw materials, equipment, real estate, etc.) are indicated in the passive. These two sides of the balance are always equal. If this is not the case, mistakes are made in the financial statements.

First of all, the company uses its own sources. These funds are formed at the stage of creating an organization. In subsequent years, work here includes a part of the profit (called undistributed).

Many companies use borrowed capital. In many cases this is advisable. In this case, the balance model can look like this:

0,9 + 0,1 = 1, where 0,9 - own capital, 0,1 - credit means.

Each presented category is considered separately, determining its cost. This allows you to optimize the structure of the balance.

Calculation

As already mentioned, the WACC is an indicator of the average return on capital. To determine it, the generally accepted formula is used. In the simplest case, the calculation procedure is as follows:

WACC = Ас * Сс + Дз * Сз, where Ас and Дз - percentage share of own and borrowed capital in the general structure, Сс and Сз - market cost of own and credit resources.

In order to take into account the profit tax, it is necessary to supplement the above formula:

WACC = Ас * Сс (1-НП) + Дз * Сз, where НП is the profit tax.

This is the formula most often used by managers and analysts of the organization. Weighted average cost is an informative indicator, unlike the average price of capital.

Discounting

ситуации на рынке капитала. The WACC indicator depends on the situation in the capital market. To be able to correlate the real state of affairs of the company with the existing tendencies in the entrepreneurial environment, the discount rate is applied.

The use of each source to finance the operation of the company is associated with certain costs. Shareholders are paid dividends, and creditors - interest. This indicator can be expressed in the form of a coefficient or in a monetary form. Most often, the cost of funding sources is represented as interest.

The cost of a bank loan, for example, will be determined by annual interest. This is the discount rate. For the share capital, this indicator will be equal to the required profitability, which owners of securities expect from providing their temporarily free funds for the use of the company.

Cost of own sources

который учитывает в первую очередь стоимость собственного капитала. WACC is an indicator that takes into account, first of all, the cost of equity. Any organization has it. Shareholders buy securities, investing them in the activities of their society. At the end of the reporting period, they want to make a profit. For this, a portion of the net profit after taxation is distributed among the participants. The other part is directed to the development of production.

The more a company pays dividends, the higher will be the market value of its shares. However, without financing its own development, the organization risks falling behind in technological development from its competitors. In this case even high dividends will not increase the value of shares on the stock exchange. Therefore, it is important to determine the optimal amount of funding for all funds.

The cost of internal sources is difficult to determine. Discounting is carried out taking into account expected profitability of shareholders. It should not be less than the industry average.

Aspects of analysis

должна рассматриваться в аспекте рыночных или балансовых показателей. The cost of capital WACC should be considered in terms of market or balance sheet indicators. If the organization does not trade its shares on the stock market, the indicator will be calculated according to the second method. For this, the accounting data is applied.

If the organization forms its own capital by means of shares in free trade, it is necessary to consider the indicator in terms of its market value. To do this, the analyst takes into account the results of the latest quotes. The number of all shares in circulation is multiplied by this figure. This is the real price of securities.

The same principle applies to all components of the organization's securities portfolio.

Example

необходимо рассмотреть представленную методику на примере. In order to determine the value of the WACC indicator, it is necessary to consider the presented methodology by an example. Let's say that the joint-stock company attracted financial sources for its work for a total of 3.45 million rubles. It is necessary to calculate the weighted average price of capital. For this, some more data will be taken into account.

Own financial sources in the company are determined at a rate of 2.5 million rubles. Their profitability (according to market quotes) is 20%.

The lender granted the company its own funds in the amount of 0.95 million rubles. The required return on its investment is about 18%. Using a weighted average indicator, the cost of capital is 0.19%.

Investment project

позволяющий рассчитать оптимальную структуру капитала для компании. WACC is an indicator that allows you to calculate the optimal capital structure for a company. Investors seek to invest their free funds in the most profitable projects with the least risk. On the part of the company, financing its activities exclusively through its own resources increases stability. However, the organization loses the benefits of using additional sources. Therefore, some of the borrowed funds should be used by the company for stable development.

The investor estimates the weighted average cost of the company's capital to determine the appropriateness of the contribution. The company must provide the most acceptable conditions for the lender. If the stability indicators deteriorated in the dynamics, a large amount of debts accumulated, the investor will not agree to finance the activities of such an organization. Therefore, the choice of the optimal capital structure is an important stage of strategic and current planning for any company.

средневзвешенной стоимости финансовых источников. All of the above suggests that WACC is an indicator of the weighted average cost of financial sources. On its basis, decisions are made on the organization of the capital structure. With the optimal ratio, it is possible to significantly increase the profit of the owners and investors of the company.