Short term loans are also included while calculating WACC because we assume

that ENCANA will keep taking short term loan in future to run its routine
operations and this debt also bear a cost.
S h o r t
T e r m
l o a n
Short Term loan = $1425 Million
Rate of Interest = r
st
= 3.52%
Amount of Interest = 1425*3.52= $50.16 Million
L o n g
T e r m
Other long Term Debt = $127

8 Million
Rate of Interest = r
olt
= 5.25% (Assuming Prime Rate is charged)
Amount of Interest = 1278*5.25% = $67.095 Million
Interest on publicity traded = total interest payable for the year

(interest on
other long term debts+ interest on short term debt)
Interest on publicity traded = 524 - (50.16+67.095)
= $406.745 Million
Rate of interest on publicly traded = r
d
=interest/Debt
= 406.745/5351 = 7.60%

Average Cost on Debt = w

olt
*r
olt
+w
plt
*r
d
+w

st
*r
st
= 1278/8054*5.25% + 5351/8054*7.605 +1425/8054*3.52%
= 0.833 + 5.049 + 0.622
= 6.505 %
By this rate about $524 million interest is paid by company on its debts, but
according to law interest expense is Tax exempt, and WACC is calculated for
future forecasting for projects. So in order to calculate WACC, we will take
rate of interest after tax.
Rate of tax can be calculated by dividing interest expense over net earnings
before tax.
T = 1260/4089
T = 30.81%
Average cost on debt after tax = r
d-at
= 6.505 (1- T)
= 6.505 (1- 30.81%)
r
d-at
= 4.50 %

o s

o n

E q u i

We can calculate cost on equity by two methods:

CAPM

Dividend growth model

B y
C A P M
Using SML Equation:
r
s
= r* + RP
m
(b)
r* = 4.20 % (Govt. long Term Treasury Bills)
r
m

= 13.9% (S&P arithmetic average return)

RP
m
=r
m

r*
= 13.9-4.20
= 9.7
Beta = 1.27
r
s
= 4.20 + 9.7 *1.27
r
s
= 16.519 %

i v i d e n d

Rs = (D1/ P
o

F) + g
Where:
D1= next year dividend
P
o
= current price of share in market
F = Floatation Cost
Averse growth from past data:
r
s
= (D
o
(1+ g) / P
o

g r o w

t h

o d e l


F) + g
r
s
= 0.28 (1+0.1611) / 56.75 (1- 0.05) + 0.1611
r
s
= 0.325108/53.9125 +0.1611
r
s
= 16.713%
Average r
s
= (16.713+16.519)/2 = 16.616%
Year Dividend Per Share Growth %
2002 0.20 (25.00)
2003 0.15 33.33
2004 0.20 40.00
2005 0.28 16.11
Average Growth

W A C C
The WACC equation is the cost of each capital component multiplied by its
proportional weight and then summing:
WACC = r
D
(1- T
c
)*( D / V )+ r
E
*( E / V )
Where,
R
e
= cost of equity
R
d
= cost of debt
E = market value of the firm's equity

D = market value of the firm's debt

V = Total Capital = E + D
E/V = w
e
= percentage of financing by equity
D/V = w
d
= percentage of financing by debt
T = corporate tax rate
By putting Values:
Total Equity= E = no of shares * price of shares
= 854.9 * 56.75
= $48515.575 million
Total Capital = Equity + Debt
= 48515.575+ 8054
= $56596.575 Million
WACC = w
d
*r
d
+w
e
*r
e
= 8054/56596.575 * 4.5 + 48515.575/56596.575 * 16.616
= 0.6404 + 14.2436
= 14.884%