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Barb william and Steven Lau, two managers from service firms were attending a week-long executive
education course at w well known business school in feburary 2006.Encanna was a leading oil and gas
producers in North America.The assigment was to calculate WACC(weighted average cost of capital).

We have given data in 5 exhibits to calculate WACC.

To calculate WACC we have to calculate

Weight of Debt

Rate of debt

Tax

Weight of Equity

Rate of Equity

Let start the Assigment.


 
 

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital
sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.
All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in
WACC notes a decrease in valuation and a higher risk.

 

Total Capital = total equity + total debt

= $16007 + $8054

= $24601

Wd=debt/total capital

=8054/24601

=0.33

  

We=equity/total capital

=16007/24601
 =0.67



Firstly we calculate by Direct Method to Calculate rd

Long term,

Long term debt/total debt

=524/8054

=0.065



In 2nd method we calculate the rd for short term and long term by taking avg of long term rates
given in exhibit 3 and short term rate which is given in case 3.52 and then multiply them by their
weights to their rates.

Rate of issuing debts

r

 r



 



 



Add these four and then divide by 4 to take avg.

 r       

 


  

average short term rate of debt.




± 

Then we calculate short term and long term debts weights


Short term debt 






Long term debt 
 



multiply weights into rates

$

 
  
r   
  r





The third method for calculating rate of debt is that we separately calculate all the components of debts




Total short term debt=1425

Rate of short term debt=3.52%

=1425*3.52%

=50.16





Other long term debt= 1278

Considering that Encana is capable of Prime rate of interst = 5.25%

=1278*5.25%

=67.095

  !
 
 
" 


Publically traded, including current portion Debt = 535

Net interest paid=524

We will exclude the knowing amounts of short term debt and other long term debt portion

=524-50.16-67.095

=467.745

We will divide remaining interest amount paid by publically traded debt to calculate rd

=467.745/5351
=0.087

 

Now we will take the average of all rd¶s calculated by three methods

 
   


  




    

r###    


By SML equation

 By dividend growth model

± Earning per share


   

 
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%
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Long term bonds are yielding () is given in this case.

We will take arithmetic average return 13.9 which is more accurate than geometric mean so we
will take the average arithmetic mean.

$
 r 
Beta is also given in the case which is




$ 


#r 
*
&r 

$ 
r
r

2nd method for calculating cost of equity

 ` 1
ê
0 ¥1ê
ê

0 0
I have the price 5 +, +- is given for 2005.

We will take average growth rate by taking average growth of dividend per share

%    
.


.  r


/0 = /1 #
r  .&

/0
= 0.28#
r   )

  

23
$
= 
.
45

6 77-
 
 r
+, +-

 17.6

±
 

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EPS = 4.01

Price of a share(P)=52.56

No of outstanding shares=854.9

Net Earning=P*No of outstanding shares

Net Earning=52.56*854.9M

Net Earning=44933.54

Dividend per share=0.28

Cost of equity ( ) =EPS/P

=4.01/52.56

 =7.63%
And finally the last one thing is required that is tax.

Tax  


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