WEIGHTED AVERAGE COST OF CAPITAL

(WACC)
Presented by: Group 3
Raju Singh - 22
Shashank Kumar - 13
Madhvendra Tiwari - 15
Nitin Sharma - 19
Sagar Agarwal - 23
Definition
A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources, including
common shares, preferred shares, and debt. The cost of each type of capital is weighted by its percentage of total capital
and then are all added together.

WACC = (E/V x Re) + ((D/V x Rd) x (1

– T)) + P/V*KP
Where:
E = market value of the firm’s equity
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity
Rd = cost of debt
T = tax rate
KP = cost of preferred stocks
 Equity Risk Premium

Cost OF Beta Cost of Equity

Equity

Weighted Average
Weighted Average
Cost of Capital
Risk Free Rate Cost of Capital

Average Yield on Cost of Debt

Debt (aftertax)
Cost Of Debt

Tax Shield
Cost of Equity
The cost of equity is an implied cost or an opportunity cost of capital. It is the rate of return an investor requires in order
to compensate for the risk of investing in the stock.

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) which equates rates of return to volatility
(risk vs reward). Below is the formula for the cost of equity:

Re = Rf + β × (Rm − Rf)
Where:
Rf = the risk-free rate (Govt. T-bill rate)
β = equity beta (also known as the levered beta)
Rm = annual return of the stock market

Cost of Debt
The cost of equity is an implied cost or an opportunity cost of capital. It is the rate of return an investor requires in order
to compensate for the risk of investing in the stock.
WACC uses:
It helps to determine company’s ability to:
• Invest in other business
• Acquire other business
• Calculating value of business
• Financial modelling of Internal Investments
• Managing Credit rating

Lower the WACC is better which means company can access capital at lower cost.

Reflection of company’s Risk profile, Financial Health and its strategic vision for future.
Limitations of WACC
Difficult to measure in practice: Some of the inputs to WACC are difficult to measure in practice and require analyst
judgment. For example, an analyst must come up with a realistic list of comparable companies if the analyst wants
to calculate a company’s levered beta.

Difficult to apply to a specific project: WACC is usually calculated at the corporate level, using the corporation’s cost
of equity and target capital structure. However, calculating the WACC of individual investments a company is
considering may or may not have the same risk-and-return characteristics of the parent company.

Use of historical data: Valuation is forward looking but many of the inputs to WACC are based on historical data.
For example, the equity risk premium is almost always based on past data, as is beta. Therefore, WACC implicitly
assumes the past will continue in to the future, which is obviously not always the case.

Private companies: Although it’s possible to calculate WACC for private companies, it is more difficult, especially
around cost of equity. This can be mitigated by using the comparable company approach to calculating beta that
was discussed earlier. Additionally, a private company’s cost of debt may be proxied by looking at the cost of debt of
similarly credit-rated companies.
(Standalone)
Government Security(T-bill Rate):
Avg. Return from Stock Market:
Determining Beta(β)
 FY 2024 FY 2023

Debt-to-Equity 0.29 0.22

WACC
Ratio
Total Capital= D = .29 E +E = .22 E +E
+E = 1.29 E =1.22E

Calculation Weight of Debt

Wd
= .29 E/1.29E
= 0.2248
= .22 E/1.22E
= 0.1803

Weight of Equity = E/1.29E = E/1.2E

We = 0.7752 = 0.8333

Finance Cost 697 (in cr) 312 (in cr)

Total Loans
(Secured + 16413 14309
Unsecured)
Cost of Debt = 697/16413 % = 312/14309 %
= 4.25% = 2.18%
 FY 2024 FY 2023

Re = Rf + β × (Rm − Re = Rf + β × (Rm −
Cost of Equity Rf) Rf)
= 7.08% + = 7.24% + 0.919(20-
0.919(8.8-7.08)% 7.24)%
Tax Rate=1−PAT/PBT
= 8.66% Tax Rate=1−PAT/PBT
= 18.96%
Tax Rate = 1- = 1-
8836/11554 5302//6584
=23.5% =19.47%
WACC=We⋅Re+Wd⋅Rd⋅(1− WACC=We⋅Re+Wd⋅Rd⋅(1−
WACC T) T)
Calculation =(0.7752*8.66%) =(0.8333*18.96%)
+(0.2248*4.25%(1-23.5%)) +(0.1803*2.18%(1-
19.47%))
=7.44%
=16.10%
 FY 2024 FY 2023

0.005 0.020

WACC
Debt-to-Equity
Ratio
Total Capital= D = .005 E +E = .020 E +E

Calculation
+E = 1.005 E =1.020E

Weight of Debt = .005 E/1.005E = .020 E/1.020E

Wd = 0.0049751 = 0.019607

Weight of Equity = E/1.005E = E/1.020E

clearly not realistic, We = .9950 = 0.9803
possibly an error due to
large lease interest
expense not matched with Finance Cost 1932 (in mn) 1866 (in mn)
proportional lease
liabilities. Total Loans
We'll use assumed cost of (Secured + 331 12158
debt = 7% (realistic Unsecured)
industry average for
Cost of Debt = 1932/331 % = 1866/12158 %
automotive sector in
= 583% = 15.34%
India).
 FY 2024 FY 2023

Re = Rf + β × (Rm − Re = Rf + β × (Rm −

WACC
Cost of Equity Rf) Rf)
= 7.08% + = 7.24% + 1.345(20-
1.345(8.8-7.08)% 7.24)%
Tax Rate=1−PAT/PBT
= 9.39% Tax Rate=1−PAT/PBT
= 24.40%
Tax Rate

Calculation
= 1- = 1-
132094/170404 80492/101591
=22.48% =20.76%
WACC=We⋅Re+Wd⋅Rd⋅(1− WACC=We⋅Re+Wd⋅Rd⋅(1−
WACC T) T)
Calculation =(0.9950*9.39%) =(0.9803*24.4%)
+(0.0049*583%(1- +(0.0196*15.34%(1-
22.48%)) 20.76%))

=11.55% =24.14%
 FY 2024 FY 2023

0.005 0.006

WACC
Debt-to-Equity
Ratio
Total Capital= D = .005 E +E = .006 E +E

Calculation
+E = 1.005 E =1.006E

Weight of Debt = .005 E/1.005E = .006 E/1.006E

Wd = 0.0049751 = 0.00596

Weight of Equity = E/1.005E = E/1.006E

We = .9950 = 0.9940

Finance Cost 115.42 (in cr) 93.06 (in cr)

Total Loans
(Secured + 1107.14 972.21
Unsecured)
Cost of Debt = 115.42/1107.14 % =93.06 /972.21 %
= 10.42% = 9.57%
 FY 2024 FY 2023

Re = Rf + β × (Rm − Re = Rf + β × (Rm −

WACC
Cost of Equity Rf) Rf)
= 7.08% + = 7.24% + 0.908(20-
0.908(8.8-7.08)% 7.24)%
Tax Rate=1−PAT/PBT
= 8.64% Tax Rate=1−PAT/PBT
= 18.82%
Tax Rate

Calculation
= 1- = 1-
5321/7005 4100/5489
=24.03% =25.30%
WACC=We⋅Re+Wd⋅Rd⋅(1− WACC=We⋅Re+Wd⋅Rd⋅(1−
WACC T) T)
Calculation =(0.9950*8.64%) =(0.9940*18.82%)
+(0.0049*10.42%(1- +(0.00596*9.57%(1-
24.03%)) 25.30%))

=8.75% =18.74%