# That's WACC!

### FAQ's:

1. ##### Why is WACC important again?:

The short answer is: A firm should use WACC as the discount rate when calculating the Net Present Value (NPV) of any 'typical' proejct.

2. ##### How exactly does this That's WACC calculate WACC?:

When you enter a ticker symbol, That's WACC retrieves the following information about the company:

• From the BALANCE SHEET (last 3 years data, if available)
• Short Term Debt (and current portion of long-term debt)
• Long Term Debt
• From the INCOME STATEMENT (last 3 years data, if available)
• Interest Expense
• Income Before Tax
• Income Tax Expense
• Other Data
• The firm's Market Capitalization (intraday stock price x shares outstanding)
• The firm's Beta (β)
• An estimate of the Risk-free borrowing rate (currently we assume 3%)
• An estimate of the Market risk premium (currently we assume 11%)

Using the data from the sources above, we calculate the components of the WACC equation as follows:

For rD, the firm's return on Debt:

From the INCOME STATEMENT, we know the interest paid for the most recent fiscal year. Then from the BALANCE SHEET we add the (short and long-term) debt for the TWO prior years. Dividing this figure by 2 gives a rough 'average' for the debt outstanding for the prior fiscal year.

Finally, by dividing the INTEREST EXPENSE by the AVERAGE DEBT, we arrive at an estimate for rD

For Tc, the firm's corporate tax rate:

From the INCOME STATEMENT, we add the prior 3 year's "Income Tax Expense", and divide this by the prior 3 year's "Income Before Tax".

For D, the firm's Total Debt; E, the firm's Market Capitalization, and for V, the firm's "Enterprise Value":

Total Debt, D, is calculated as the short-term + long-term debt listed on the BALANCE SHEET.

The firm's Market Cap is based on the intraday stock price of the firm at the time the query was run.

The firm's "Enterprise Value" is simply defined as TOTAL DEBT + MARKET CAP, or D + V

For rE, the firm's cost of equity:

To quote our own "WACC Formula" page, the firm's cost of equity is best (or, at least, most easily) calculated using the CAPM (Capital Asset Pricing Model), which states:

Cost of Equity rE = rf + β(rM - rf) where...

rf = the 'Risk Free' rate of return (currently assumed to be 3%)
β = the firm's 'Beta'; the correlation between the firm's returns and the market
rM = the historical "Market" risk premium (currently assumed to be 11%)