Looking for a way to measure the ability of company managers? Consider WACC…

Julie Brownlee, Fsp Invest, 22 Dec. 2014

Tags: wacc, weighted average cost of capital, investing, how to calculate wacc, what is wacc, measure company management ability



When you invest in shares, you want to know whether you’ll be adequately compensated for the risks you take on as a shareholder.

So how can you do this?

You can calculate a company’s weighted average cost of capital (WACC).

Read on to find out how to do this…



What is WACC?


Weighted average cost of capital (WACC) is the rate of return a company must make on the money shareholders have in the company to stop investors putting their money elsewhere.

In other words, it’s the company’s cost of money.


How to calculate WACC


To calculate WACC, you need the weighted average of the cost of borrowing money from banks or bondholders, in other words debt, and shareholders (equity).

The cost of debt is the interest rate a company pays to borrow, minus the company’s tax rate. You take the tax rate into account as it reduces a company’s taxable profits.

Equity costs a company more than debt. This is because shareholders receive payment last so they need to receive more to reflect this.

So how much more do shareholders need? This is subject to debate and there isn’t a right answer.

It comes down to two things:

  • How much debt a company has; and
  • How risky the underlying business is.

For example, say Company ABC is half-funded by debt at 5% and half-funded by equity at 10%. WACC is (0.5 x 5%) + (0.5 x 10%) = 7.5%.

If you want to measure the ability of managers at a company, WACC may be a better alternative to earnings per share (EPS).

When interest rates are low, managers can boost a company’s EPS by using more debt to fund the company. But this might not earn enough of a return to compensate shareholders for the risks they take on investing in the company.

So there you have it, how to use WACC to measure the ability of company managers.

*********** Best seller *************

Never pay full price for anything ever again!

If you’re still paying full price for the items you buy or the things you do, you’re being ripped off.

You could be getting them for as much as 75% off – and even free!

You see, part of living a millionaire lifestyle is making sure you’ve all the money you need.

But you can only do that if you know how to take advantage of the money-making opportunities others are missing out on.

To live a millionaire lifestyle, you need to learn the ‘art of the deal’

Click here to find out what I’m talking about…

*********************************


Related QA

Pic
d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
Pic
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
Pic
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
Pic
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
Pic
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles:


Latest:

Comments
0 comments



 
 


Youtube Twitter Facebook

Connect with us:    

POPULAR TOPICS
  • Accelerated Investor