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Calculation of Weighted Average Cost of Capital for a Company

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Task: Describe how the WACC is currently calculated for PetSmart Inc. Is this the best approach to be using?

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The Weighted Average Cost of Capital (WACC) is calculated using the cost of various capital involved in an organization's finances. "In research, teaching, and application we have found it convenient for some time now to compute the cost of capital as a weighted average of the costs of the various sources of capital" (Nantell & Carlson, 1975, p. 1343). Over the years many professionals and researchers have argued "that these restrictions as to cash-flow patterns are not necessary and that a weighting approach to computing the cost of capital is valid as long as the firm's leverage position is maintained (Nantell & Carlson, 1975, p. 1343). Determining the WACC for PetSmart would be based on the company's various capital expenditures involved to get the business up and running, and how the company stands against its competition or its leveraged position. Whether or not this average is determined before taxes or after is in great debate, but ...

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This solution explains how to calculate the WACC of PetSmart and then evaluates the process in 609 words with two references included for further research.

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Let's try calculating the weighted average cost of capital (WACC). Calculate the WACC given the following assumptions: a. Company tax rate is 40 percent. b. Company has an outstanding bond issue with a 7-7/8 coupon, market price of 103-5/8 (percent of 100% par, in 32nds.), semiannual coupon payments, and 12 years to maturity. c. Company has an outstanding preferred stock issue paying an 8 percent dividend, $100 par, and a market price of $98.35. Flotation (issuance) costs on a new issue are 8 percent. d. Common equity financing is through retained earnings. The Company has a beta of 1.22. The market risk premium is 6 percent and the risk-free rate is 4 percent. The company's capital structure is 40 percent debt, 10 percent preferred, and 50 percent common equity.

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