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
IndicatorSource of information2019
Tax rate of United Stateshttps://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 USDhttp://pages.stern.nyu.edu/~adamodar/2.62%
Equity risk premiumhttp://pages.stern.nyu.edu/~adamodar/4.19%
Unlevered beta for oil and gashttp://pages.stern.nyu.edu/~adamodar/1.03
Debt/Equity for oil and gashttp://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 USD8.7%
Cost of Debt in USD
Cost of DebtAssumption12.0%
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 capital64.4%
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 debt8.7%