WACC Formula: Concept, Quick Calculations, Leases, Interview Questions, and More
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- Опубликовано: 17 июл 2024
- In this tutorial, you’ll learn the concept behind WACC (the Weighted Average Cost of Capital), and you’ll learn the quick-and-easy method of estimating it along with more complex methods; you’ll also learn how to deal with Operating Leases in the calculation and how to respond to common interview questions about this topic.
For all the files and resources, please see:
www.mergersandinquisitions.co...
Table of Contents:
0:00 Introduction
2:08 Part 1: The Big Idea Behind the Discount Rate
3:15 The WACC Formula
4:47 Part 2: Quick-and-Dirty WACC
10:40 Part 3: More Complex Calculations
18:25 Cost of Equity and WACC
22:57 Part 4: Leases in WACC: What to Do
28:11 Part 5: WACC Interview Questions
31:33 Recap and Summary
![Working Capital and the Change in Working Capital in Valuation and Financial Modeling [REVISED]](http://i.ytimg.com/vi/tMgty8jwmHI/mqdefault.jpg)
Amazing video! Thank you for making such valuable content accessible to all :)
Thanks for watching!
You can find the files and resources at the link below:
www.mergersandinquisitions.com/wacc-formula/
And yes, this tutorial simplifies some things. We didn't want to make a 4-hour video discussing every alternative approach to WACC but rather wanted to give you the tools to calculate it quickly and, time permitting, make it a bit more complex, in-line with interview questions.
Awesome lecture!
Thanks for watching!
Thank you so much for your sharing
Thanks for watching!
Thank you!
Thanks for watching!
This was helpful. Thank you. From South Africa
Thanks for watching!
@@financialmodeling Thank you, Brian. Had Superday, yesterday and it went well. Your videos have been so helpful.
@@financialmodeling I got the offer 😁. Once again, thank you
thank you!!
Thanks for watching!
21:34 the moment of wow, that was exhaustive and hands down, man.
Thanks!
Thanks a lot for this and all your videos! I have a question: When do you invest in the whole capital structure proportionally apart from acquisitions (if there is other way)? Thanks!
You don't, which is why WACC is theoretical and not a practical representation of the actual returns you can expect to earn on a company. In theory, you could buy proportional amounts of the company's equity, debt, etc., but very few people actually do that.
very good
Thanks for watching!
Thanks for the video!
I have only one question regarding the topic. If there are international companies in a peer group, which beta should i look for? I mean beta vs a local index of a company or vs s&p 500 or something else? Thanks!
You should compare the company to its index, so use the country-specific index for this company.
Thanks for video. What is the best way to lookup the market cap or find the number of shares outstanding on a particular date? Did you just lookup the stock price on the particular date and multiply by number of ordinary shares outstanding on the balance sheet?
In real life at finance firms, everyone uses services like Capital IQ or FactSet. Without those, you could look up the share price on Google or Yahoo Finance (or others) and find the company's share count from its most recent filings.
Thank you fro the video! I don't recall you mentioning in the videos, but for the cost of leases used in the WACC calculation, is this just the average effective interest rate on the leases or the most effective interest rate on the most recent lease commitment?
You should go by the lease discount rate the company discloses in its filings (see the coverage in this channel). If they don't disclose it, use the effective interest rate on senior debt. But in most cases, you shouldn't even include leases in the WACC calculation (see the separate lease tutorials).
Can we use the equity value in balance sheet to calculate the "% of Equity to Total Capitalization" instead of using the market cap? Thanks!
No. You "could" do this in theory, but it's a bad idea because the book value of equity and market value of equity are extremely different for most companies. And it takes about 2 seconds to find a public company's market cap.
@@financialmodeling Apprrciate your response! So if we are valuing a company that has not yet go public, I guess we can use the equity from the balance sheet? Thanks again!
@@DH0518 It is better to just skip the re-levering process in this case and estimate Beta based on other methods... see the tutorials on private company valuation.
What do you think of the use of NET debt instead of gross debt for the weighting in the WACC formula. In practice a lot of people seem to go with this approach, but I don't quite get it as it seems to double count (excess) cash and cash equivalents (once as a deduction in net debt and once as it is included in equity). A rationale I heard is that one assumes that "optimally" excess cash is used to pay of debt.
It's a bad idea because of this double-counting issue and because Cash does not completely "offset" Debt (e.g., in some cases, the Debt cannot be repaid early at all, so Cash does not remove the risk). Very high Cash balances can also distort these numbers and produce nonsensical values for WACC.
Can we subtract country's default spread while calculating risk free rate?
I don't know why you would ever do that. If anything, you would start with the risk-free rate from a "risk-free" country and then add the default spread of the country in the analysis.
Should not be non-controlling interest, and in-the money options be accounted for as equity in the WACC formula? Given that they have a claim on FCF, which is discounted by WACC.
Do we omit it in the calculation as they do not have a material impact on the outcome? Would be great if you have an answer to that.
Great content as always!
In-the-money options are accounted for as Equity in the WACC formula because the Equity Value should be based on the diluted share count.
Noncontrolling Interests are not considered a part of the company's capital structure because they do not directly fund the company's business operations and, unlike other forms of capital, they don't really have a "cost" associated with them (no interest, preferred dividends, common equity dilution, etc.).
Hey, thank you for the reply. Trying to get my head around that so would be great if you have an answer.
To my understanding NCIs do fund business operations. Given that the parent company consolidates 100% of the revenues and expenses. FCF which is ultimately discounted by WACC also includes the FCF portion attributable to NCI holders. Therefore, the NCI holder do have a theoretically a claim on FCF. In conclusion, NCI should be included or not?
@@No-dx5mk The key word here is "directly" in "directly fund the company's business operations." Yes, you could argue that partially owned subsidiaries indirectly give the company another funding source, but no company acquires a majority stake in another one just to fund its business. But many companies issue debt and equity to fund their businesses. You will never see DCF or WACC analyses from large banks that include NCI in the calculations. It's just not something people do in real life.
@@financialmodeling Thanks again for the reply. Yes, I agree that is not used on the job. At my it is we also not included in the calculation but we have cells in the template that showcase NCI.
I am just trying to understand it from a theoretical point of view. My thought process is that theoretically it could be included, but (a) it is odd to include NCI in projected wacc. As NCI should not be considered part of optimal capitalisation. But that would not explain why we do not include it when calculating a bottom up wacc for peer companies. (b) It is not included as the NCI position is so small that it is not considered material in the wacc calculation therefore it is not included.
Would you agree with (a) and/or (b)? Could you comment on that?
How about unfunded pension? Are they included as debt?
@@No-dx5mk Unfunded pensions are not part of the WACC calculation because, again, they do not have a direct cash cost in the same way debt and preferred stock do. For NCIs, I think you might be over-thinking this a bit. The items in the Enterprise Value bridge do not have a 1:1 correspondence to the items in the capital structure for the WACC calculation. The rule of thumb for WACC is that if something does not have a direct cash cost associated with it or the potential to convert into common equity, it should not be counted because it does not affect investors' expected/targeted returns.
for quick and dirty WACC in 6:50 mark, shouldnt the cost of debt be the market value cost of debt for the calculation of WACC? This is especially so as you had used market value of equity (using market capitalisation). Just thinking out loud.
In theory, yes, but the market value of debt is usually close to its book value or face value for non-distressed companies, so it makes a marginal difference next to the market vs. book value distinction for equity.
At 8:10, you said that we should use the government Bond rate. But what if that govt bond is risky (i.e has a default spread)?
I am asking this because i found the following note of aswath damodaran about risk free rate calculation:- " Aswath Damodaran:
This should be today's long term riskfree rate. If you are working with a currency where the government has default risk, clean up the government bond rate to make it riskfree (by subtracting the default spread for the government)."
Depends on how you are conducting the analysis and what your reference frame is. If you are comparing a company to other possible investments in this country where the government has default risk, you won't necessarily do this. The "Risk-Free Rate" is higher, and that's fine. You could arguably adjust it if you're comparing this company to others in countries without government default risk, but that's probably not a great comparison anyway.
how do you calculate cost of debt if a company is virtually debt-free? shall i take the average cost of debt of it's competitors?
Yes, look at the debt issuances of peer companies and competitors.
Good
Thanks for watching!
Being a college student this stuff, taking assumptions and seeing fiannce formulas valuation models etc... seems daunting and difficult what do you think about it should I quit finance
You should probably take a few classes, gain more exposure, and see what you think before giving up.
Greetings ! Please skip to 09:51. Please explain Cost of Equity calculation. CAPM equation is Risk Free rate + beta * ( Market risk premium - Risk Free Rate). You have multiplied market risk premium by beta. Why have you not deducted market risk premium from risk free rate? Presumably, market risk premium is net of risk free rate. Am I right?
The "Equity Risk Premium" is the Market Risk Premium - Risk-Free Rate. It's derived from the observed annualized stock market return minus the 10-year government bond yield. See Damodaran's surveys and updates.
Why do you call Beta Levered Beta? Is it because the company has debt?
Levered Beta reflects the risk of both the company's operations and leverage (debt). If a company has no debt, Levered Beta = Unlevered Beta.