Weighted Average Cost Of Capital (WACC)

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Weighted Average Cost Of Capital (WACC) is a calculation of company cost of capital which is based on a weighted average between debt and equity. Its mathematical expression is listed below;

Weighted Average Cost Of Capital (WACC) 1

WACC represents the minimum return on investment that can be a base line for a company to make a decision for new projects. Generally, companies will accept only projects that have returns more than WACC.

This example will use the previous information from Cost of Debt and Cost of Equity article to demonstrate WACC calculation.

Weighted-Average-Cost-Of-Capital-(WACC)-cover Continue reading →

Earth Structure and Plate Tectonic

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The basic concept of the Earth structure and Plate Tectonic is good to know for drilling oil and gas wells.

The image below (Figure 1) shows the Earth structure. There are tree compositional layers which are curst, mantel and core. At the center of the Earth, the center core is a solid iron core which is surrounded by a liquid iron core. Core has a range between 2,900 – 6,370 km from surface. Mantel which has its range between 100 – 2,900 km consists of upper and lower mantel. Lower mantle (Meshosphere) is hot but strong due to high pressure however upper mantle is weak, hot and molten. Crust is a surface of the Earth and a majority of the Earth crust is made up of iron, silicon, oxygen and magnesium.

Figure 1 – Earth Structure

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Cost of Equity

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The Cost of Equity is an investment return which a company offers its shareholders in compensation for their income stream and taking risk of investment with a company.

Cost of Equity which is based on the constant dividend growth model is mathematically expressed here.

Cost of Equity = [Dn ÷ P] + G

Where;

Dn = dividend per share to be paid next year

P = average stock price in the year the latest dividend paid

G = expected growth of dividend on next year

A next year dividend is mathematically expressed like this.

Dn = Dc × (1 + G)

Where;

Dc = dividend per share for present year

Therefore,

Cost of Equity = [Dc × (1 + G)] ÷ P + G

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Cost of Debt

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Cost of Debt (COD) is an effective rate that a company will pay on it current debt. The Cost of Debt (COD) can be measured in term before or after tax COD however the after tax Cost of Debt (COD) is often used.

After tax Cost of Debt (COD) is mathematically expressed in the equation below;

cod equation

Where;

Di = individual loan amounts

ri = interest rate of the individual loan

Dt = total loans that a company has

t = company corporate tax rate, %

Note: the interest payment on loans is classified as an operating expense and it is a tax deductible. Continue reading →