Erotyquewhyspers --
I?ll use the Q2 quarterly report for Google, which is listed on the
NASDAQ as GOOG because the company only went public last year and it
dramatically changed the balance sheet. You can find the income
statement and balance sheet here:
Securities & Exchange Commission
Google Second Quarter 2005 (Quarter ended June 30, 2005)
http://www.sec.gov/Archives/edgar/data/1288776/000119312505168339/d10q.htm
WACC
======
The full weighted-average cost-of-capital (WACC) for a firm is given by:
WACC = Rc (E/VL) + rD(1-t)(D/VL)
where,
Rc: return on equity
E/VL: proportion of equity in total firm value
rD: debt or bond percentages
t: tax rate (expressed as a decimal; 40% = 0.40)
D/VL: proportion of debt in total firm value
Investopedia.com
?Weighted-average cost-of-capital? (undated)
http://www.investopedia.com/terms/w/wacc.asp
DEBT AND EQUITY
------------------------------
Total shareholders? equity (E) is $3,953,857,000 (from the Balance
Sheet). The current portion of equipment leases are $291,000 ? and
there is no other debt on the balance sheet. (In fact, the company
earned $33.4 million on its cash balances.) The debt is so small
(D/VL is less than .0001) that it?s impact on these calculations will
be zero.
The tax rate, by the way, is calculated by using tax provision/net income:
For the six months:
Tax rate = $239,869,000 / $951,876,000 = 25.2%
In finance issues, tax rates are often below the U.S. corporate
maximum of 35% due to previous losses or investment tax credits.
Sometimes they?ll be slightly higher due to state taxes.
RETURN ON EQUITY
------------------------------
This is actually the most-difficult portion of the calculation, as
Google is a fast-growing company, with REVENUES growing by 95% in the
first six months of 2005 (compared to 2004) and income going up almost
400%. However, the most-conservative calculation of Rc would
annualize the $712 million in net income ? putting it at $1,424
million.
Rc = annual net income / total equity = $1,424 million / $3,954 million = 36.01%
Because this is an all-equity firm (D/VL is effectively zero), that?s
you?re weighted-average cost of capital.
DISCLAIMERS
---------------------
1. Google?s net income is growing so fast that Rc will undoubtedly be
higher due to annual net income being higher than $1.424 billion.
2. There are alternate ways to calculate Rc using the capital-asset
pricing model, but this requires an estimate of stock-market returns,
Google?s beta and Treasury bill rates. These are commonly used in
finance but seem to be outside the scope of your question. However,
if you?re interested in researching this further, again Investopedia
has an excellent summary:
Investopedia
CAPM (undated)
http://www.investopedia.com/terms/c/capm.asp
Google search strategy:
Weighted-average cost-of-capital
Capital-asset pricing model
Your data used in the question appears out-of-date, so it may be
contributing to confusion about Google's capitalization and WACC. If
there is any confusion, please let me know via a clarification request
before rating this Answer.
Best regards,
Omnivorous-GA |
Clarification of Answer by
omnivorous-ga
on
10 Sep 2005 08:13 PDT
To answer your question: "Also, is one formula of WACC better than
another?" It really depends on what's being evaluated:
* are you an investor looking to see what the returns on purchasing
stock are likely to be?
* are you a Google finance person (or Google manager) trying to make
a decision whether or not to invest in a project?
* are you a Google finance manager or executive trying to evaluate
optimal strategy?
* are you a stock market analyst trying to estimate future value of the firm?
As an example, companies involved in leasing businesses -- where
there's a steady, predictable cash flow -- can use debt to reduce
their cost-of-capital. So, depending on the investment decision (and
competitive situation) Google's financial officer might choose to
raise money for a project using bonds.
As for different formulas -- you often find a variety of ways of
estimating the cost-of-capital because a company isn't public. For
public companies, modern financial theory says "use the capital-asset
pricing model" because it's based on the stock market, which is
efficient in its pricing. However, even here there are problems --
most notably a prediction of what future market returns are going to
be.
I'd recently answered this question on WACC and you may be interested
in the assumptions behind using it (it's even longer than the
disclaimer section to your answer!) --
Google Answers
"Calculating Weighted Average Cost Of Capital," (Omnivorous-GA, Aug. 12, 2005)
http://answers.google.com/answers/threadview?id=554492
Best regards,
Omnivorous-GA
|
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