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Introduction to WACC
WACC stands for weighted average cost of capital. It is that financial metric in which each
category of capital is proportionately weighted, by taking weighted average we can see that
how much company has to pay for every rupee/ dollar it finances. Companys assets are
financed by either debt or equity. More complex companys capital structure the more
laborious it is to calculate WACC. It is important for a company to know its weighted average
cost of capital as a way to gauge the expense of future funding.
A company looking to lower its WACC may decide to increase its use of cheaper financing
sources.
Methodology
1.1 For calculating the beta () it is necessary to use the historical stock values on variables
of study, therefore, KSE-100 index is used as the market portfolio representative. The
monthly closing prices of the companies in 2012 and 2013 have been taken from the KSE
and Business Recorder website. The slope function has been used on excel to calculate
the respective betas of both the companies, where Market Return of KSE was taken as
the independent variable and Stock Return was taken as the dependent variable.
1.2 To calculate the return on market portfolio of KSE-100 index, percentage change in
index closing value is taken. All the percentages are then added and divided by the total
number of observations to find the average monthly market rate of return (Rm). Since the
data is actual, the risk free rate has already been subtracted, therefore, it can also be
considered as Risk Premium.
1.3 Data has been collected from the respective companies websites, trading economics
website, KSE website and business recorder website.
1.4 Corporate tax rate in Pakistan in 2011 and 2012 was 35%.
1.5 The 1 year treasury rate is taken as the proxy for Risk Free Rate of Return (Rf) in
2011 is 13.272 and in 2012 is 11.25.
WACC Formula
Where, Beta () is the correlation of security which means it is the link of security with
market return. It is a measure of sensitivity of a share price to movement in the market
price. It measures systematic risk which is the risk inherent in the whole financial
system. Beta coefficient is an important input in capital asset pricing model to calculate
required rate of return on a stock. It is the slope of the security market line.
Kohinoor Energy ltd dont take any long term debt so, their cost of debt is zero and Rd
is also zero in 2011 and 2012 because they financing through current liabilities and
internal financing.
The interest per annum of Southern Electric Power Ltd is US Treasury rate +4%.
DATE
30-Jul10
31-Aug10
30-Sep10
29-Oct10
30-Nov10
31-Dec10
31-Jan11
28-Feb11
31-Mar11
29-Apr11
31-May11
30-Jun11
Rf
13.272%
Rm
2.238%
Beta
1.659
ELECTRIC
POWER
30-Jul10
31-Aug10
30-Sep10
29-Oct10
30-Nov10
31-Dec10
31-Jan11
28-Feb11
31-Mar11
29-Apr11
31-May11
30-Jun11
3.12
2.55
2.34
2.32
2.19
2.23
2.17
1.54
1.64
1.36
1.57
1.31
7.586
18.269
8.235
0.855
5.603
1.826
- 2.691
29.032
6.494
17.073
15.44
-1
16.561
LT.DEBT+EQUITY
2471399000
1104641000
44.7%
EQUITY
1366758000
55.3%
Re
-5.028%
Rd
7.39%
Tax rate
35%
WACC
-0.634%
20112012
WAC
C
20112012
SOUTHERN ELECTRIC POWER COMPANY
LIMITED
DAT
E
29-Jul11
30-Aug11
30-Sep11
31-0ct11
30-Nov11
30-Dec11
31-Jan12
29-Feb12
30-Mar12
30-Apr12
31-May12
29-Jun12
KSE 100
CLOSING
12190.3
7
11070.5
8
11761.9
7
11868.8
8
11532.8
3
11347.6
8
11874.8
9
12877.8
8
13761.6
7
13990.3
8
11786.6
2
13801.4
1
Rf
11.25%
Rm
1.1704%
Beta
0.728
RETURN
-2.446
9.186
6.24
5
0.90
-9
-2.831
1.605
4.64
6
8.44
6
6.86
3
1.66
- 2
15.752
17.09
4
DAT
E
29-Jul11
30-Aug11
30-Sep11
31-0ct11
30-Nov11
30-Dec11
31-Jan12
29-Feb12
30-Mar12
30-Apr12
31-May12
29-Jun12
SOUTHERN
ELECTRIC
POWER
RETURN
1.21
0.92
0.86
0.67
0.69
0.7
0.83
0.91
1.66
1.13
1.26
1.23
- 7.634
23.967
- 6.522
22.093
2.98
5
1.44
9
18.57
19.63
9
82.41
8
31.928
11.50
42.381
LT.DEBT+EQUITY
2900992000
1534234000
52.9%
EQUITY
1366758000
47.1%
Re
3.91%
Rd
5.97%
Tax
35%
WACC
3.894
DAT
E
30-Jul10
31-Aug10
30-Sep10
29-Oct10
30-Nov10
31-Dec10
31-Jan11
28-Feb11
31-Mar11
29-Apr11
31-May11
30-Jun11
29-Jul11
30-Aug11
30-Sep11
31-0ct11
30-Nov11
30-Dec11
31-Jan12
29-Feb12
30-Mar12
30-Apr12
31-May12
29-Jun12
CLOSI
NG
PRIC3.12
1.5171
STANDARD DEVIATION
0.6628
COEFFICIENT OF VARIATION
0.4369
2.55
2.34
2.32
2.19
2.23
2.17
1.54
1.64
1.36
1.57
1.31
1.21
0.92
0.86
0.67
0.69
0.7
0.83
0.91
1.66
1.13
1.26
1.23
KOHINOOR ENERGY
LIMITED
WACC 20102011
20102011
KOHINOOR ENERGY LTD
DAT
E
RETURN
30-Jul10
31-Aug10
30-Sep10
29-Oct10
30-Nov10
31-Dec10
31-Jan11
28-Feb11
31-Mar11
29-Apr11
31-May-
KSE 100
CLOSING
10519.0
29813.0
5
10013.3
110598.
4
11234.7
6
12022.4
6
12359.3
6
11289.2
2
11809.5
4
12057.5
4
12123.1
8.19
-9
6.711
2.04
1
5.84
3
6.00
4
7.01
1
2.80
-2
8.659
4.60
9
2.10
0
0.54
30-Jul10
31-Aug10
30-Sep10
29-Oct10
30-Nov10
31-Dec10
31-Jan11
28-Feb11
31-Mar11
29-Apr11
31-May-
11
30-Jun11
5
12496.0
3
4
3.07
6
11
30-Jun11
Rf
13.272%
Rm
2.238%
Beta
0.559
DAT
E
KOHINOOR RETUR
N
ENERGY
LTD
25.5
14.35
024.2
5.098
23.2
4.132
21.9
19.6 - 5.603
8
10.137
21.7
10.67
8
19.1 -1
17.9 12.305
9
17.5
-5.812
2
16.9
-2.613
3.539
17.5
3.55
-0
5.714
16.5
LT.DEBT+EQUITY
169458600
EQUITY
169458600
100%
Re
7.099%
Rd
0%
Tax rate
35%
WACC
7.099%
20112012
WAC
C
20112012
KSE 100
RETURN
CLOSING
DAT
E
KOHINOOR
RETURN
ENERGY LTD
29-Jul11
30-Aug-
12190.3
7
11070.5
2.4461
-
29-Jul11
30-Aug-
17.7
5
16.8
4.41
-2
11
30-Sep11
31-0ct-
8
11761.9
7
11868.8
9.1859
6.245
3
0.908
11
30-Sep11
31-0ct-
16.2
5
16.4
5.352
3.274
1.04
11
30-Nov11
30-Dec-
8
11532.8
3
11347.6
-9
2.8314
-
11
30-Nov11
30-Dec-
2
16.5
6
0.48
-7
11
31-Jan12
29-Feb-
8
11874.8
9
12877.8
1.6054
4.646
0
8.446
11
31-Jan12
29-Feb-
12
30-Mar12
30-Apr-
8
13761.6
7
13990.3
3
6.862
9
1.661
12
30-Mar12
30-Apr-
12
31-May12
29-Jun-
8
11786.6
2
13801.4
- 9
15.752
17.093
12
31-May12
29-Jun-
12
Rf
Rm
Beta
Re
Rd
Tax rate
WACC
11.25%
1.170%
0.450
15.7
7
14.6
4.424
6.912
46.79
8
21.5
5
22.2
83.10
-9
2
20.5
6
21.0
7.471
2.18
9
2.33
1
21.5
12
LT.DEBT+EQUITY
LONG TERM DEBT
EQUITY
2
16945860
00
0
16945860
00
6.712%
0.000%
35%
6.712%
0
100%
KOHINOOR ENERGY
LIMITED
2010-2012
DAT
E
30-Jul10
31-Aug10
30-Sep10
29-Oct10
30-Nov10
31-Dec10
31-Jan11
28-Feb11
31-Mar11
29-Apr11
31-May11
30-Jun11
29-Jul11
30-Aug11
30-Sep11
31-0ct11
30-Nov11
30-Dec11
31-Jan12
29-Feb12
30-Mar12
30-Apr12
31-May12
29-Jun12
CLOSING
PRICE
25.5
24.2
23.2
21.9
19.6
8
21.7
8
19.1
17.9
9
17.5
2
16.9
17.5
16.5
17.7
5
16.8
16.2
5
16.4
2
16.5
15.7
7
14.6
8
21.5
5
22.2
2
20.5
6
21.0
1
21.5
19.283
STANDARD DEVIATION
2.911
COEFFICIENT OF VARIATION
0.151