Finance: WACC Analysis for Exxon Mobil

This article discusses the weighted average cost of capital (WACC) analysis for Exxon Mobil, including the cost of equity, cost of debt, and the overall WACC.

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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
WACC Analysis..........................................................................................................................2
Cost of Equity..............................................................................................................................2
Cost of Debt.................................................................................................................................3
Weighted Average Cost of Capital..............................................................................................3
Conclusion.......................................................................................................................................3
References........................................................................................................................................4
Appendix..........................................................................................................................................5

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Introduction
The weighted average cost of capital for a firm shows the minimum costs associated for a
company in respect to the share price of the company. The two main components of the weighted
average cost of capital is the weight and costs associated with each of the capital sources such as
the equity financing and the debt financing. The weighted average cost of capital should be at an
optimal risk and the company should optimally decide the level of equity and the level of debt
financing of the company after considering the business and the financial factors of the company.
The WACC for the Exxon Mobil company was derived after taking the costs and weight of each
of the capital financing sources company has deployed in the operations of the company.
Discussion
WACC Analysis
The weighted average cost of capital for a firm could be derived with the help of the
formula Weighted Average Cost of Capital = Weight of Equity* Required Return on Equity+
Weight of Debt* (Cost of debt * (1- Tax Rate)). The weight of equity on the other hand could be
computed with the help of the formula {Return on Equity (Re) = Risk free rate of return+
Beta*(Return on Market- Risk free rate of return)}.
Cost of Equity
The cost of equity for Exxon Mobil was calculated by taking the market risk premium,
the beta of stock and the prevailing 10-year US Treasury Yield. The same has been incorporated
for calculating the current cost of equity for the company. The equity value for the company was
around $ 194,500 stating the overall weight of equity to be around 88.85% in the overall capital
structure of the company (Finance.yahoo.com 2019). The cost of equity was calculated for the

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company to be around 6.75%. The beta was taken at 1.04 which was the three year beta for the
company and the market risk premium was taken at 4% (Corporate.exxonmobil.com 2018).
Cost of Debt
The cost of debt for Exxon Mobil in the overall capital was around 2.46% where the
weightage of debt was around 11.15%. The weightage of debt was determined by taking the
interest cost paid by the company on the long term borrowings of the company. The tax rate that
was taken into consideration for the company was around 35%. The cost of debt for Exxon
Mobil was calculated to be around 2.46% (Corporate.exxonmobil.com 2018).
Weighted Average Cost of Capital
The WACC for Exxon Mobil was calculated to be around 6.18% and the same has been
derived by taking the cost of debt and equity and the relevant weightage of each
(Bloomberg.com 2019).
Conclusion
The WACC for the company was found to be optimal where the exposure of debt for the
company in the form of higher debt and leverage was found to be less. Lower amount of debt
also reduces the financial risk of the company and at the same time allows the company to take
advantage of the tax shield generated by the debt financing.

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References
Bloomberg.com. (2019). BloUS Generic Govt 10 Year Yield. [online] Available at:
https://www.bloomberg.com/quote/USGG10YR:IND [Accessed 15 Mar. 2019].
Corporate.exxonmobil.com. (2018). Annual Report 2017. [online] Available at:
https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/annual-meeting-
materials/annual-report-summaries/2017-Summary-Annual-Report.pdf [Accessed 15 Mar.
2019].
Finance.yahoo.com. (2019). Exxon Mobil Corp. [online] Available at:
https://finance.yahoo.com/quote/xom/key-statistics/ [Accessed 15 Mar. 2019].

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Appendix
1) Weighted Average Cost of Capital
: Weighted Average Cost of Capital = Weight of Equity* Required Return on Equity+ Weight of Debt* (Cost of debt * (1- Tax Rate))
Where;
2.59%
4%
1.04 6.18%
6.75%
Amount ($) (%) Change
24,406 11.15%
194500 88.85%
2,18,906 100.00%
Amount ($)
601
24,406
2.46%Cost of Debt
Particulars
Return on Equity =
Weighted Average Cost of Capital
Shareholder's Equity
Long Term Borrowings
Total
Particulars
Long Term Borrowings
Interest Expenses
Risk Free Rate (10 Year US Treasry Yield):
Market Risk Premium:
Beta (3 Year Monthly Data)
Return on Equity = Risk free rate of return+ Beta*(Return on Market- Risk free rate of return)
Weighted Average Cost of Capital