WACC - Rate of return
Hi guys,
I haven't done Valuations for a while and I'm currently trying to understand it again. Hope you can help me:
Let's assume a company has an EBIT of 1,000,000 and we acquire it at 4x EBIT --> 4,000,000
What's the rate of return?
I would first calculate the cost of equity (2,000,000) and cost of debt (2,000,000)
EBIT: 1,000,000
Multiple: 4x
Value: 4,000,000
EBIT/EV = 25%
Equity: 2,000,000
Debt: 2,000,000
Cost of Debt: 5% = 100,000
Cost of Equity: risk free rate (3%) + market risk premium (4%) x beta (0,87) = 6,09% = 121,800
WACC: DEBT/Total Capital x cost of debt + equity/total capital x cost of equity
WACC: 2,000,000 / 4,000,000 x 5% + 2,000,000 / 4,000,000 x 6,09%
0,025 + 0,03 = 0,55 = 5,545%
4,000,000 x 5,545 % = 221, 800
Therefor our EBT is 1,000,000 - 221,800 = 778, 200
EBT/ Total Capital = 19,45%
Is that all correct? Thanks !
you didn't tax effect the debt in your WACC calc.
wacc is:
d/total x cost of debt x (1-taxrate) + e/total x capm(cost of eq),,,,,,,,, assuming no preferred.
What's your tax rate? You need to use after tax cost of debt. Also, per PEMDAS, your cost of equity is 648 bps, not 609. Cost of Equity = risk free rate + (mkt risk premium x Beta)
A market risk premium of 4% seems low to me.
A quick corpfin course ... (It's the only useful stuff in learned in college, and i actually really learned it during my internships) WACC: Kd(1-T)D/A + KeE/A WACC: 4.865% (Assuming a 35% Tax Rate and that your Beta is already levered otherwise lever it with LBeta = UBeta(1+(1-T)*D/E) (Btw, WACC assumes an unlevered FCF(It means no Interest payments) and returns the Enterprise Value) EV - Net Debt = Equity Value Net Debt = Debt - Cash (Bonus track: Firm Value FV = EV + Cash)
Back to your problem EBIT - I = EBT (The resulting FCF has to be discounted with the cost of Equity: Ke) I = Kd*Debt = 100,000 EBT =900,000 why did you use the CAPM for this? EBT/ASSETS = 22.50% (Capital may refer to many things, but mostly it is a portion of Equity) EBT/EQUITY = 11.25%
Thanks Kraken for your help, could you just explain how you calculate the EBT/Equity = 11.25% Thanks!
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