Question

please I need the calculation of the current WACC of Jpmorgan . please show steps for understanding.thnks

Answer 1

Steps   

Step # 1 – Calculating Market Value of Equity / Market Capitalization

Step # 2 – Finding Market Value of Debt

Step # 3 – Calculate Cost of Equity

Step # 4 – Calculate the Cost of Debt

Step # 5 – Find the Tax Rate

Step # 6 – Finding Market Value of Preferred Stock (If Preferred Stock otherwise jump to step 8)

Step # 7 – Finding Cost of Preferref Stock (If Preferred Stock otherwise jump to step 8)

Step # 8 – WACC (weighted average cost of capital) Calculation (Using WACC Formula)

1. Without Preferred Stock

WACC Formula = (E/V * Ke) + (D/V) * Kd * (1 – Tax rate)

1. E = Market Value of Equity.
2. V = Total market value of equity & debt.
3. Ke = Cost of Equity.
4. D = Market Value of Debt.
5. Kd = Cost of Debt.
6. Tax Rate = Corporate Tax Rate.

2. With Preferred Stock.

WACC = E/V * Ke + D/V * Kd * (1 – Tax Rate) + P/V * Kp

1. E = Market Value of Equity.
2. V = Total market value of equity & debt.
3. Ke = Cost of Equity.
4. D = Market Value of Debt.
5. Kd = Cost of Debt.
6. Tax Rate = Corporate Tax Rate.
7. P =Market Value of Preferred stock
8. KP = D (dividend)/ P0 (price) (For Preferred Stock only)

Market Value of Debt

• It’s difficult to calculate the market value of debt because very few firms have their debt in the form of outstanding bonds in the market.
• If the bonds are listed, we can directly take the listed price as the Market value of Debt.
• Now, let’s go back to the Weighted Average Cost of Capital and look at V, the total market value of equity and debt. It is self-explanatory. We just need to add the market value of equity and estimated market value of debt and that’s it.

Cost of Equity

• Cost of Equity (Ke) is calculated using the CAPM Model. Here’s the formula for your reference.
• Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return – Risk-free Rate of Return)
• Here, Beta = Measure of risk calculated as a regression of the company’s stock price.

Cost of Debt

• We can Calculate the cost of debt using the following formula – Cost of Debt = (Risk-Free Rate + Credit Spread) * (1 – Tax Rate)
• As the cost of debt (Kd) is affected by the rate of tax, we consider After-Tax Cost of Debt.
• Here, credit spread depends on the credit rating. Better credit rating will decrease the credit spread and vice versa.
• Alternatively, you can also take a simplified approach to calculating the Cost of Debt. You can find take the cost of Debt as Interest Expense / Total Debt
• Tax Rate is the Corporate Tax Rate which is dependent on the Government. Also, note that if preferred stock is given, we also need to take into account the cost of preferred stock.
• If preferred stock is included, here would be the revised WACC formula – WACC = E/V * Ke + D/V * Kd * (1 – Tax Rate) + P/V * Kp. Here, V = E + D + P and Kp = Cost of Preferred Stocks.

Cost of Preferref Stock

Cost of Preferred Stock = Preferred stock dividend / Preferred stock price

Cost of Preferred Stock = (Preferred stock dividend at year 1 / Preferred stock price) + dividend growth rate