PwC WACC Formula
To calculate the WACC’s contained within the online Cost of Capital Report, PricewaterhouseCoopers uses the following weighted average cost of capital formula:
| R d |
The pre-tax cost of debt, based on the current yield on traded company debt instruments or estimated, taking account of company gearing, size, industry risk, etc
|
| T c |
The marginal corporate tax rate
|
D, E
& V |
D and E are the market values of the business' debt and equity respectively and V is the sum of D and E. Therefore, D/V and E/V represent the relative weightings of debt and equity employed in the business' operations
|
| R e |
The cost of equity capital
|
The cost of equity capital for each company used in calculating our WACC’s has been derived solely from share trading in the New Zealand Stock Exchange (NZSE) and has not been 'blended' with the cost of equity capital for similar companies listed on overseas stock exchanges.
PwC applies the post investor tax specification of the CAPM in establishing the cost of equity for a business, using the following formula and inputs:
R e = R f ( 1 - T i ) + b e [R m - D m T m - R f ( 1-T i )]
Where:
| R f |
The risk free rate of return based on the current yield on five year Government Stock
|
| T i |
Investors' effective tax rate on interest and dividend income and capital gains. Because some investors are subject to capital gains tax in New Zealand, T i is not equal to the marginal personal income rate
|
| b e |
Equity Beta
Equity beta estimates used in calculating our WACCs are based on an average of monthly returns over (up to) five years, blended with weekly based estimates where less than three years of data is available. The beta estimates incorporate no adjustments to historical betas as measured.
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[R m - D m T m - Rf (1-T i )]
Post Investor Tax Market Risk Premium, where:
| D m |
The cash dividend yield on the market portfolio
|
| T m |
Tax parameter applicable to the market dividend yield
|
We derive our estimate of the post investor tax market risk premium from PwC research on New Zealand equity market returns. Refer to our paper describing the methodology we have employed to estimate the market risk premium.
Refer to our present WACC input assumptions.
Please note that the above formula is our standard methodology, and is used to calculate all WACC’s in the online Cost of Capital Report. In practice, we may apply a different formula in circumstances where our standard methodology is inappropriate. For further information on how we derive our WACC for each company surveyed in the Cost of Capital Report, please contact us.