This article discusses the computation of the weighted average cost of capital (WACC) of Genesis Energy Limited, a public listed organisation in New Zealand. It explains the components of WACC and the steps involved in its computation. The article also provides references for further reading.
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Running head: WEIGHTED AVERAGE COST OF CAPITAL Weighted Average Cost of Capital Name of the Student: Name of the University: Author’s Note: Course ID:
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1WEIGHTED AVERAGE COST OF CAPITAL Table of Contents Background of Genesis Energy Limited:........................................................................................2 Weighted average cost of capital (WACC) of Genesis Energy Limited:........................................2 References:......................................................................................................................................4
2WEIGHTED AVERAGE COST OF CAPITAL Background of Genesis Energy Limited: Genesis Energy Limited is a public listed organisation in New Zealand involved in electricity, electricity generation, LPG and natural gas retailing. It is the biggest natural gas and electricity retailer in New Zealand having 39% and 26% market share respectively in the financial year of 2015-2016 (Genesisenergy.co.nz, 2018). The organisation has it’s headquarter situated at Auckland in New Zealand. Weighted average cost of capital (WACC) of Genesis Energy Limited: In the words of Frank and Shen (2016), WACC is used to compute the cost of capital of an organisation where each component of capital is weighed proportionately. With the increase in beta and rate of return on equity, there would be increase in WACC due to rise in risk and fall in valuation. In case of Genesis Energy Limited, the WACC of the organisation is computed with the help of the following steps: ParticularsDetailsUnits BetaA1.34 Risk-free RateB2.21% Market Rate of ReturnC7% Market Risk PremiumD=C-B4.79% Cost of equityB+(AxD)8.63% ParticularsDetailsUnits Net debtA$ 1,183.00 Total equityB$ 1,961.50 Total net debt and equityC=A+B$ 3,144.50 Weight of debtD=A/C37.62% Weight of equityE=B/C62.38% Finance expensesF$75.30 Cost of debtG=F/A6.37%
3WEIGHTED AVERAGE COST OF CAPITAL Corporate tax rateH28% Cost of equityI8.63% Weighted average cost of capital (WACC) [DxGx(1-H)+ (IxE)]7.11% As the risk-free rate and market rate of return are provided, it is possible to obtain market risk premium for Genesis Energy Limited by deducting risk-free rate from market return. In order to calculate the WACC of the organisation, the following steps are performed: The net debt and total equity of the organisation are obtained from its annual report to arrive at the weight of debt and weight of equity. The finance expenses are taken into consideration, which are divided by net debt in order to compute the cost of debt (Holthausen & Zmijewski, 2014). The cost of equity of Genesis Energy Limited is computed by multiplying Beta with market risk premium and then the remainder is added with risk-free rate. It has been evaluated from the annual report of Genesis Energy Limited in 2018 that the organisationusesthecorporatetaxrateof28%,asprevalentinNewZealand (Gesakentico.blob.core.windows.net, 2018). Finally, by considering all the above-points, WACC of the organisation is computed by using the following formula: WACC = (Weight of debt x Cost of debt) x (1 – Tax rate) + (Weight of equity x Cost of equity)
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4WEIGHTED AVERAGE COST OF CAPITAL References: Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital.Journal of Financial Economics,119(2), 300-315. Genesisenergy.co.nz.(2018).Genesis Energy | Power Company | Electricity & Gas NZ | Genesis NZ. Retrieved 22 October 2018, from https://www.genesisenergy.co.nz/ Gesakentico.blob.core.windows.net.(2018).Retrieved22October2018,from https://gesakentico.blob.core.windows.net/sitecontent/genesis/media/new-library-(dec- 2017)/about_us/investor/pdfs/2018/full%20year/ge-annual-report-29aug-2018.pdf Holthausen, R. W., & Zmijewski, M. E. (2014).Corporate valuation: theory, evidence & practice. Cambridge Business Publishers.