Final answer:
To determine the WACC from financial statements, you need to gather information like debt, equity, and tax rate. The formula to calculate WACC is (E/V) * Re + (D/V) * Rd * (1 - Tax Rate). Example calculation using given values: WACC = (10/15) * 10% + (5/15) * 5% * (1 - 30%) = 6.67%.
Step-by-step explanation:
To determine the Weighted Average Cost of Capital (WACC) from financial statements, you will need to gather certain information such as the company's debt, equity, and tax rate from the balance sheet and income statement. The formula to calculate WACC is: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate), where E is the market value of equity, V is the total market value of both equity and debt, Re is the cost of equity, D is the market value of debt, Rd is the cost of debt, and Tax Rate is the corporate tax rate.
Let's say a company's balance sheet shows that it has $10 million in equity and $5 million in debt. The income statement reveals a corporate tax rate of 30%. If the cost of equity is 10% and the cost of debt is 5%, the WACC can be calculated as follows:
- Calculate the market value of equity (E) = $10 million
- Calculate the market value of debt (D) = $5 million
- Calculate the total market value of equity and debt (V) = $10 million + $5 million = $15 million
- Calculate the cost of equity (Re) = 10%
- Calculate the cost of debt (Rd) = 5%
- Calculate the tax rate (Tax Rate) = 30%
- Plug the above values into the WACC formula: WACC = (10/15) * 10% + (5/15) * 5% * (1 - 30%)
- Calculate the WACC = 6.67%