8 ms·
WACC = (E/D x Ke) + ((D/E x Kd) x (1 – T)) E = equity value D = debt value Ke = cost of equity Kd = cost of debt T = tax rate Ke = Rf + B * ERP Rf = risk
by formercoder 4y ago
WACC = (E/D x Ke) + ((D/E x Kd) x (1 – T))
E = equity value
D = debt value
Ke = cost of equity
Kd = cost of debt
T = tax rate
Ke = Rf + B * ERP
Rf = risk free rate
B = beta of company
ERP = equity risk premium
Kd = Rf + credit spread
In theory, if a project's ROIC is less than WACC, it does not generate economic value.
- MuffinFlavored 4y agoHow does this apply given that we're assuming Google has enough cash on hand from profit of other aspects of their business that they do not finance most projects through new loans (debt) from banks at current interest rates because they don't need to?
- formercoder 4y agoTheir cash balance doesn't really matter, it impacts their cost of capital in various ways, but you can still compare the ROIC of any given project to the overall company's cost of capital.
- pgodzin 4y agoTheir cash balance can also make higher risk-free returns otherwise
- sjkoelle 4y agoand charlie munger said he never used calculus
- formercoder 4y agoThat’s all algebra :)