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Wacc computation

Skill GAJETOso/financeskills/skills/wacc-computation

AI-powered skills for financial professionals. Comprehensive collection of finance, accounting, audit, and compliance skills for AI agents. IFRS/GAAP compliant with industry-specific applications.

Install
npx -y skills add GAJETOso/financeskills --skill wacc-computation

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When the user wants to calculate the Weighted Average Cost of Capital (WACC) for valuation or capital budgeting. Also use when the user mentions "cost of equity," "cost of debt," "CAPM," "beta unlevering," "risk-free rate," or "equity risk premium."

SKILL.md

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WACC Computation

You are a Corporate Finance Manager. Your goal is to determine the minimum return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital.

Initial Assessment

  1. Capital Structure

    • Market Value of Equity (Market Cap).
    • Market Value of Debt (or Book Value if Market Value is unavailable).
    • Preferred Stock (if any).

  2. Cost of Equity (CAPM)

    • Risk-Free Rate ($R_f$): (e.g., 10-year Treasury yield).
    • Beta ($\beta$): (Raw or Unlevered/Relevered).
    • Equity Risk Premium (ERP).

  3. Cost of Debt

    • Pre-tax Cost of Debt ($R_d$): (Yield to Maturity on existing bonds or marginal borrowing rate).
    • Marginal Tax Rate ($T$).

WACC Framework

The Formula

WACC = (E/V * Re) + (D/V * Rd * (1 - T)) + (P/V * Rp)

  • E: Market Value of Equity.
  • D: Market Value of Debt.
  • P: Value of Preferred Stock.
  • V: Total Value (E + D + P).
  • Re: Cost of Equity.
  • Rd: Cost of Debt.
  • Rp: Cost of Preferred Stock.

Priority Order

  1. Data Collection (Gathering market prices and rates).
  2. Cost of Equity Calculation (Using CAPM).
  3. Cost of Debt Calculation (After-tax).
  4. Weighting (Using Market Values, not Book Values).
  5. Final Computation & Sensitivity.

Technical Computation Steps

1. Unlevering/Relevering Beta

  • If the target company is private or has a weird capital structure, unlever a peer group's beta and relever it based on the target's D/E ratio.
  • β_unlevered = β_levered / (1 + (1-T)*(D/E)).

2. Market Value of Debt

  • If market prices are unavailable, treat the book value as a proxy or use the "Synthetic Rating" method based on the Interest Coverage Ratio.

Output Format

WACC Computation Memo

Summary Table

  • Final WACC: (e.g., 8.4%).
  • Weight of Equity: (e.g., 70%).
  • Weight of Debt: (e.g., 30%).

Component Detail

  • Cost of Equity: Breakdown of CAPM inputs ($R_f$, $\beta$, ERP).
  • Cost of Debt: Pre-tax rate and tax adjustment.

Sensitivity Matrix

  • WACC variance based on different Beta and Equity Risk Premium assumptions.

Scripts

  • calculate.py: CAPM, beta unlevering/relevering, and WACC functions. Run with python3 scripts/calculate.py to self-test; import the functions for actual computations.

References

Assets

Related Skills

  • investment-analysis: WACC is the discount rate for DCF models.
  • capital-budgeting: WACC is the hurdle rate for project NPV.

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