Using Forward Tax Rates and CAPM Inputs in a WACC Estimate

Summary

The discussion explains two steps in estimating weighted average cost of capital from forecast financial statements: selecting a tax rate and calculating the cost of equity. The reply recommends using the forecast tax rate expected to apply going forward, rather than an earlier historical value, in the debt component of WACC. It also gives the standard structure of WACC as weighted equity and after-tax debt costs, and identifies CAPM as a way to estimate the cost of equity from the risk-free rate, beta, and market risk premium.

The exchange is brief and offers no worked calculation or detail about estimating capital weights, beta, debt cost, or forecast assumptions. Its tax-rate recommendation depends on the specific forecast context; users should check that the chosen rate is appropriate for the period and valuation they are analyzing.

Key ideas

• WACC combines the weighted costs of equity and debt, with the debt cost adjusted for taxes.
• CAPM estimates the cost of equity from the risk-free rate, beta, and market risk premium.
• A forward-looking valuation generally calls for an expected future tax rate rather than a historical rate.
• The exchange does not provide enough data to calculate a complete WACC.

Tags

# Trying to calculate WACC (Weighted Average Cost of Capital) for this (small) data set


# Trying to calculate WACC (Weighted Average Cost of Capital) for this (small) data set












I've attached the data set I'm working with to this post. I'm trying to calculate the WACC using this data. I found a formula here:

http://www.investopedia.com/ask/answers/063014/what-formula-calculating-weighted-average-cost-capital-wacc.asp

I guess my problem is figuring out what the variables actually stand for, and how I can use the formula across the different Financial statement forecast's. For instance there are 4 different values for Tax rate so I'm not sure which one to use.

The question I'm working on just tells me to calculate the WACC. Any ideas on where to start?

Appreciate any help.

## Answer by Jfalmouth13 (score 1)

https://quant.stackexchange.com/a/24636

As you can see, the tax rates are listed (from L - R) as 31.0%, 38.5%, 38.5%, and 38.5%, and because your valuations should be forward looking, you should use what is expected, meaning the 38.5% tax rate. Does that make sense?

## Answer by MAX (score 0)

https://quant.stackexchange.com/a/33411

WACC formula: E/v * Re + D/V * Rd * (1-Tc)

First thing you have to calculate Cost of equity (Re) in the WACC formula above. To calculate cost of equity you use CAPM formula = rf + Beta * (rm-rf).

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