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Subject:  Re: EVA Economic Value Added Date:  3/3/2000  8:12 AM
Author:  swallen1 Number:  5694 of 8329

jmviap wrote: I was wondering how you find out what the cost of capital is for a corporation. I know we can find out how much their cost of debt is by looking at the bonds a company has outstanding and their rate of return, however how does one find out or calculate the cost of equity capital to then determine the cost of capital for a firm.


The weighted average cost of capital (WACC) for a company is calculated as follows:

(Cost of Debt)*(1-T)*(D/A) + (Cost of equity)*(E/A)
Cost of Debt = Weighted average of all outstanding debt
T = Tax Rate
D/A = ratio of debt to assets
Cost of Equity = Return on Equity (5 year appreciation + dividends is a good approximation)
E/A = ratio of equity to assets

That being said, its interesting to note that many companies use a benchmark, or desired rate for EVA calculation instead of the actual rate. For instance, Coca-Cola uses 12% as its worldwide WACC. Why? Its 1% per month. Simpler is better.

Steve (Simple Simon)
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