Calculate and evaluate the WACC for General electric
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Can you please describe how the weighted average cost of capital (WACC) is calculated for General Electric. Can you evaluate the effectiveness of this approach. Please be detailed.
Also, if you can direct me to any websites or reference material on how General Electric calculates its WACC, that would be great.
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The solution explains how to calculate the WACC for General Electric and also to evaluate the approach taken for its effectiveness.
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Please see the attached file. I have tried to explain in detail and also given the calculation.
Can you please describe how the weighted average cost of capital (WACC) is calculated for General Electric. Can you evaluate the effectiveness of this approach. Please be detailed.
Also, if you can direct me to any websites or reference material on how General Electric calculates their WACC that would be great.
WACC is calculated as
WACC = Proportion of long term debt X after tax cost of debt + Proportion of Preferred stock X cost of preferred stock + Proportion of common stock X Cost of common stock
First look at the balance sheet of GE to see which type of financing it uses.
From the latest 10-k (obtained from www.sec.gov) we see that in 2007 GE gad the following capital components
1. Long term borrowings
2. Common Stock
We now need to calculate the proportion and cost of these capital components
First let us look at proportions -
The correct proportion to use is the target capital structure. This value would not be available in the annual report. The next best alternative is the market values. The market value of equity can be calculated as Number of shares outstanding X price per share. Calculating the market value of debt may be difficult. If all debt is not traded, then the market value is not available and in that case we use the book value of debt. From 10-K we get the following details for long term debt.
LONG-TERM BORROWINGS
December 31 (Dollars in millions) 2007
Average
rate (a) Maturities 2007 2006
GE
Senior ...
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