Wacc for Fiat Group
The WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond, the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market, a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in that market.
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A beta greater than 1 indicates that the firm is more heavily exposed to market factors than the average firm in that market. The formula I will be using to calculate the cost of equity is the CAP-M formula and is as follows; KE = RF + B (RM – RF) RF = Risk free rate, B = Firm’s Beta, RM = Return on the market The cost of debt or KD is calculated by finding the internal rate of return for all the firms bonds.
First the coupon on the bond is found for each of the remaining years until maturity, then we deduct tax, finally we choose test two discount factors and put our findings into the following formula; IRR = DCF1 + (DCF2 – DCF1) * NPV1 – 0 / NPV1 – NPV2 Once we have found our KE and KD we must find the weights of both the equity and debt capital. Finally all of this information is entered into our WACC formula which is as follows where MV is is the market value of the company; WACC = (KE * MV of equity / MV of company) + (KD * MV of debt / MV of company) Cost of Debt
I also enjoyed, whilst I found quiet difficult, the level of personal opinion that goes into a report like this. I was very interested in the different figures I found for Fiats beta, I chose a high beta of 1. 62 due to the fact that the motor industry is so volatile as seen by the effect of the recent economic crash on car sales. Also the sharp turn that the price oil can make has a large impact on the motor industry, much more so than the effect on other manufacturing industries as not only does Fiat use oil in the production of its products but its products also require it to function.
I ran into a few difficulties at the start mainly when it came to the choosing of a company to research. At first I choose Ryanair but as Ryanair do not have any issued bonds I decided to look into another company at least for my first attempt of a report of this nature. The main thing I gained from doing this report was the ability to research a company, at first I found it very difficult and time consuming just trying to retrieve figures that I thought were right.