The Weighted Average Cost of Capital (WACC) represents the average cost of financing a company’s debt and equity. There are two approches to calculating it, one based on the “Build-up” approach, the other on the Capital Assets Pricing Model (CAPM) approach.
\[\text{WACC} = C_e \times E + C_d \times D\]
where \(C_d\) is the after-tax cost of debt, E and D the proportion of equity and debt in a firm based on market value, and \(C_e\) is the cost of equity, which, using the CAPM approach, is calculated with:
\[C_e = R_f + \beta(R_m) + R_s + \text{Risk} + \text{Firm Risk}\]
where \(R_f\) is risk-free rate, \(R_m\) is the market premium, \(R_s\) is the company size premium, Risk the country risk premium, Firm Risk the firm-specific risk and \(\beta\) is a measure of the systematic risk, usually of the industry sector, in comparison to the market as a whole.
According to this paper, most companies do it wrong.
waccR make sit super easy to get the data for the US:
library(waccR)
# WACC:
wacc_usa <- wacc()
head(wacc_usa)## # A tibble: 6 x 11
## Industry Number_Firms Beta Cost_Equity Equity_Debt
## <chr> <dbl> <dbl> <dbl> <dbl>
## 1 Advertising 41 1.36 10.21 62.53
## 2 Aerospace/Defense 96 1.07 8.56 81.18
## 3 Air Transport 18 1.12 8.83 61.10
## 4 Apparel 58 0.88 7.46 75.96
## 5 Auto & Truck 15 0.85 7.26 39.98
## 6 Auto Parts 63 1.12 8.84 74.21
## # ... with 6 more variables: Std_Dev_Stock <dbl>, Cost_Debt <dbl>,
## # Tax_Rate <dbl>, AfterTax_Cost_Debt <dbl>, Debt_Equity <dbl>,
## # Cost_Capital <dbl># Industry Betas (US):
betas_usa <- betas()
head(betas_usa)## # A tibble: 6 x 7
## Industry Number_Firms Av_Unlevered_Beta Av_Levered_Beta
## <chr> <dbl> <dbl> <dbl>
## 1 Advertising 41 0.91 1.36
## 2 Aerospace/Defense 96 0.94 1.07
## 3 Air Transport 18 0.76 1.12
## 4 Apparel 58 0.71 0.88
## 5 Auto & Truck 15 0.38 0.85
## 6 Auto Parts 63 0.94 1.12
## # ... with 3 more variables: Av_Corr_Market <dbl>,
## # Total_Unlevered_Beta <dbl>, Total_Levered_Beta <dbl>