Weighted Average Cost of Capital Analysis for BHP Billiton Ltd

WACC
BHP BILLTON
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INTRODUCTION
BHP Billiton Ltd is a multinational company, which is Anglo Australian and involved in mining
metals and petroleum. It is a dual listed public company whose headquarters are in Melbourne,
Australia. The CEO of BHP Billiton Ltd is Andrew Stewart Mackenzie. It is the second largest
mining company in the world in terms of revenue with 69.4 billion US dollars. It has many
subsidiaries including BHP Billiton Finance B. V., BHP Billiton Finance Plc and many more.
The weighted average cost of capital through dividend growth model and capital asset pricing
model will be evaluated for BHP Billiton Ltd. Also, the gearing ratios will be calculated so that
the long-term debt of the company can be compared to its capital employed or equity capital.
The weighted average cost of capital is a rate that a company expects to pay to all the
shareholders so that its assets can be financed.
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WEIGHTED AVERAGE COST OF CAPITAL
Weighted average cost of capital is the rate which is required on the investment of the
company. The funds of the company can be raised by equity, debt and other stocks. The
calculation of the weighted average cost of capital involves the average cost of the sources of
funds, which are assigned different weights as per their use (Fernandez, 2015). The total cost or
interest is calculated which is to be paid by the company for the fund it borrows. It is calculated
to interpret the position of the company and if any changes are required in the capital structure
of the company, the changes are proposed accordingly. If any new project is undertaken by the
company, then the calculation of the weighted average cost of capital is very helpful. The after-
tax costs of each component of the company's capital structure are calculated and weight is
assigned to them as per their use. The formula for calculating WACC is as follows:
WACC = ( E
V ) RE +( D
V )( 1−T C ) RD +( D
V )RP
Where:
E = market value of equity = number of outstanding shares times price per share
D = market value of debt = number outstanding bonds times bond price
V = market value of the firm = D + E
WE = ( E
V )= percentage financed with equity
WD = ( D
V ) = percentage financed with debt
RE = Cost of equity
RD = Cost of debt
RP = Cost of Preference Shares
TC = Cooperate Tax rate
CALCULATION OF WACC FOR BHP BILLITON LTD
WACC = (E/V) * (RE) + (D/V)* (1-TC) * (RD)
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Market Cap/ Total Equity = Equity (E) = number of shares * outstanding price (P0)
= 57258 million USD
Total Debt = Long-term Debt + Short Term Debt
= 30474 million USD
Total Market Value (V) = Equity (E) + Debt (D)
= 57258 + 30474
= 87732 million USD
Cost of Equity (RE) = (D1/P0)
D1= Expected dividend in a single period
P0 = market value of equity
= 2921 / 57258
= 5.10 % approximately
Cost of Debt (RD) = net income / total debt
= 2686 / 30474
= 8.81% approximately
WACC = (E/V) * (RE) + (D/V)* (1-TC) * (RD)
= (57258 / 87732) * 5.10% + (30474 / 87732) * 8.81% * (1-30%)
= 3.33 + 2.142
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