Financial Analysis: Weighted Average Cost of Capital - Genesis Energy

This report provides a detailed calculation of the Weighted Average Cost of Capital (WACC) for Genesis Energy Limited, a publicly listed company in New Zealand. The WACC is computed using the Capital Asset Pricing Model (CAPM), incorporating a beta of 1.34, a risk-free rate of 2.21%, and a market rate of return of 7%. The report outlines the steps involved, including determining the weights of debt and equity from the company's annual report, calculating the cost of debt using finance expenses, and computing the cost of equity using the CAPM formula. The analysis also considers the corporate tax rate of 28% applicable in New Zealand. The final WACC is calculated to be 7.11%, providing a crucial metric for assessing the company's cost of capital and investment decisions.

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:

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:
Particulars Details Units
Beta A 1.34
Risk-free Rate B 2.21%
Market Rate of Return C 7%
Market Risk Premium D=C-B 4.79%
Cost of equity B+(AxD) 8.63%
Particulars Details Units
Net debt A $ 1,183.00
Total equity B $ 1,961.50
Total net debt and equity C=A+B $ 3,144.50
Weight of debt D=A/C 37.62%
Weight of equity E=B/C 62.38%
Finance expenses F $ 75.30
Cost of debt G=F/A 6.37%

3WEIGHTED AVERAGE COST OF CAPITAL
Corporate tax rate H 28%
Cost of equity I 8.63%
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
organisation uses the corporate tax rate of 28%, as prevalent in New Zealand
(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)

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). Retrieved 22 October 2018, 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.