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Q: WACC of a NYSE company ( Answered ,   0 Comments )
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 Subject: WACC of a NYSE company Category: Business and Money > Finance Asked by: erotyquewhyspers-ga List Price: \$15.00 Posted: 08 Sep 2005 23:31 PDT Expires: 08 Oct 2005 23:31 PDT Question ID: 565963
 ```I have been trying to figure this out but there are more than ONE formula for WACC. I'm simply trying to find the WACC of GOOGLE. However, I really need for it to be explained. How do I find the corporate rate, cost of equity and cost of debt? 2,693,465 = Total Assets 340,368 = Total Debt I believe the Corporate tax rate is 59% but I don't know how I got that answer. If anyone can help, I'll appreciate it.```
 ```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``` Request for Answer Clarification by erotyquewhyspers-ga on 10 Sep 2005 07:44 PDT ```Omnivorous, Thank you for breaking it down as you did. You stated that I was using older data in my initial question, how can I be sure I'm suring the correct information. I thought I pulled up the latest balance sheets & income statements. I worked on a similar problem for 3 days. Now, I concerned that I didn't use the most current, information.``` Request for Answer Clarification by erotyquewhyspers-ga on 10 Sep 2005 07:48 PDT ```Also, is one formula of WACC better than another? When I goggled it, I found at least two and in the books purchased from Barnes and Nobles - I found at least one more. However, I did opt for the one on investopedia.com.``` Clarification of Answer by omnivorous-ga on 10 Sep 2005 07:51 PDT ```Erotyquewhyspers -- Probably the best way to assure that you have the most-current data is to use the Investor Relations (IR) pages for any company. Here's Google's IR page and it has a link to the Q2 earnings statement: http://investor.google.com/ A good alternate is the SEC Edgar database, which is where I picked up the Q2 earnings release. Note that it will sometimes be a day or two behind corporate IR pages: http://www.sec.gov/edgar/searchedgar/webusers.htm 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```
 erotyquewhyspers-ga rated this answer: and gave an additional tip of: \$10.00 ```You are right, I did have the most difficulty when calculating the return on equity. I completed the WACC with another company. I can now go back and see where I went wrong in my configurations. You mentioned Beta & US beta and Treasury bill rates, for the company I completed WACC on; I had to find those rates. I found the beta at uk.finance.yahoo.com as well, I googled US Treasure Bill. *whew* Your mentioning them in the disclaimer makes me more confident. This was my first time using this service and I'm very impressed. I will be back if I ever need more clarification on something. omnivorous - Thanks again.```