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Figure 1 Definition of Weighted Average Cost of Capital vide value of equity by number of shares we get value of
(WACC) a share, too.
Interest for external Risk-free
capital provided re rate rf
Sample
Entering data: set the value of ALFA, Ltd. to the Dec. 31,
1998 if you know following data:
Stock beta
a) Information from the balance sheet:
Debt (D) 55 mil. K D/C = 0.29
re = rf + (rm rf) (rm rf) Equity (E) 134 mil. K E/C = 0.71
Risk market
premium RMP Long Term Invested Capital (C) 189 mil. K = 1.00
b) After Tax Debt Cost
Income Tax Cost of External Capital rd 15 %
D = Debt
Rate t (E = Equity) Income Tax Rate (t)x100 35 %
Effective Cost of Debt rd 15(1 0.35) = 9.75 %
c) Cost of Internal Capital
Weighted Cost of Internal Capital re (CAPM2 model)
Average Cost D + r
WACC = rd(1 t) E
e 18.,42% = 10.5 + (1.1 x 7.2)
of Capital C C
Risk-free rate rf (by CNB to Dec.31. 98) 10.5 %
Stock beta () (by Brokers company) 1.1
Equity risk premium in CR (rm rf) 5.5%3 + 1.7%4
The Cost C = Value of balance
sum (E+D) d) Information from financial strategy of ALFA, Ltd.
of Debt
made for the period of 1999 2001:
EVA model for assessment of value of a company YEAR NOPAT Capital Invested (C)
1999 41 205
In previous paragraph there were defined all entries which 2000 44 222
would be used in a model for assessment of value of a com- 2001 48 241
pany. First lets state general formula. What is the form of 2002 50 260
a model mostly used in Czech companies? With respect to
transformation of economy and consequent necessity of reor- Work schedule
ganization and rebuilding of most of the companies it seems 1. Calculation of Weighted Average Cost of Capital (WACC)
to be most appropriate to use so called two-phase model. We implement entering data introduced in above to the
At first we introduce general formula: equation:
WACC = 9.75 x 0.29 + 18.42 x 0.71 = 2.83 + 13.08 = 15.91%
Value of a company = Capital Invested + PV1(EVA) WACC is 15.91%.
2. Calculation of EVA for the period of 1999 to 2001 and
If we implement above described entering parameters, then
after
n ALFA, Ltd. presumes that the structure of the capital will
EVAt EVAn/WACCn
Value of a company = Ct + + remain stable (it corresponds with the planes of a company),
t n
t=1 (1 + WACCt) (1 + WACCn) it does not expect any change in risk and therefore in cost of
where n is a length of forecasted period. capital, too. WACC can be therefore used for the second pha-
se of the calculation, too.
From above mentioned relationships it is clear that total va- YEAR EVA = NOPAT WACC x C
}
lue of a company consists of book value of invested capital 1999 8.38 = 41 0.1591 x 205
and present value of future EVA. Calculation in two phases 2000 8.68 = 44 0.1591 x 222 the first phase
means that in the first phase presents a planning horizon de- 2001 9.66 = 48 0.1591 x 241
rived from period like strategic financial plan. For example 2002 8.63 = 50 0.1591 x 260 the second phase
entering data are derived from Pro Forma sheets. The second
phase is represented by period where each entering parame- 1PV is a shortcut for Present Value
ter is not specified for each period but it is presumed that ex- 2CAPM means Capital Assets Pricing Model, the author of this mo-
pected yield lasts forewer. It is possible to meet several forms del is Sharp.
3Equity risk premium (r r ) in the most developed economy in the
m f
of calculation used for the second phase which usually takes USA is 5.5%. It represents the difference between total market rate and
into account the growth rate of a company. For our purposes risk free rate.
4Rating agencies set long term rating of each country for investors. It
we use form of perpetual bond.
represents the portion of a risk connected to the investment in given
As a result of the application of this model we get the va- area. The Czech republic was given rating A to the end of 1998 by the
lue of a company as a whole. We have to subtract value of rating agency Standard & Poors. It represents the extra premium for the
debt from this value and then we get value of equity. If we di- risk of the area of 1.7%, in total 7.2%.