Example of WACC calculation for any project in oil and gas production and exploration in USA
11/08/2019
Example of WACC calculation for any project in oil and gas production and exploration in USA
Weighted average cost of capital is considered as measure used to evaluate:
• financial and business performance (WACC is compared with economic return on assets).
• effectiveness of investment projects (WACC indicator is used as the discount rate as determining Net present value;
• effectiveness of Mergers and Acquisitions (WACC of combined company is compared with the sum of WACC of all companies before their merger);
• business valuation (WACC is used as a discount rate when determining company business value and economic profit)
Example of WACC calculation
Sector: oil and gas production and exploration
Location of project: United States
Currency of investment: USD
 Indicator Source of information 2019 Tax rate of United States https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html 27% Cost of Equity Risk-free rate in USD http://pages.stern.nyu.edu/~adamodar/ 2.62% Equity risk premium http://pages.stern.nyu.edu/~adamodar/ 4.19% Unlevered beta for oil and gas http://pages.stern.nyu.edu/~adamodar/ 1.03 Debt/Equity for oil and gas http://pages.stern.nyu.edu/~adamodar/ 0.55 Relevered beta = Unlevered beta for oil and gas * (1+(1-tax rate) * Debt/Equity for oil and gas) 1,44 Cost of Equity in USD 8.7% Cost of Debt in USD Cost of Debt Assumption 12.0% After-tax cost of debt = Cost of Debt * (1 - Tax rate) 8.8% Capital structure Weight of equity as % of capital = 1 - Weight of debt as % of capital 64.4% Weight of debt as % of capital = Debt/Equity for agricultural sector / (1 + Debt/Equity for agricultural sector) 39.9% WACC in USD = Weight of equity as % of capital * Cost of Equity in USD + Weight of debt as % of capital * After-tax cost of debt 8.7%