If I needed to find out OR calculate the weighted average cost of capital (WACC) for the company General Electric (GE), how would I find this information or what is needed from the company financial statements to aid me in coming up with the answer?
To calculate the weighted average cost of capital (WACC) for a company like General Electric (GE), you will need a few key pieces of information from the company's financial statements. Here are the steps to find this information:
1. Obtain the company's financial statements: Start by accessing relevant financial statements such as the balance sheet, income statement, and cash flow statement. These statements can be found in GE's annual report, which is publicly available on their website or through financial databases.
2. Analyze the capital structure: Identify the different sources of capital that GE utilizes, such as debt and equity. Look at the balance sheet to determine the company's total debt and equity. Debt can include long-term loans, bonds, and other interest-bearing liabilities, while equity represents the shareholders' investment.
3. Calculate the cost of debt: Determine the cost of debt by reviewing the interest expenses on the income statement and dividing it by the average total debt. Alternatively, you can also look for GE's effective interest rates on long-term borrowings or bonds, which are stated in the company's footnotes. This will help you estimate the interest rate that GE pays on its debt.
4. Estimate the cost of equity: The cost of equity represents the return required by the company's shareholders. Calculate this by using the Capital Asset Pricing Model (CAPM) or other similar methods. The CAPM considers factors such as the risk-free rate of return, GE's beta (systematic risk), and the equity risk premium.
5. Determine the weights: Assign weights to the different sources of capital based on their proportion in the capital structure. To get these weights, divide the market value of each source by the total market value of the company's debt and equity combined. For instance, if GE has $500 million in debt and $1 billion in equity, and their combined market value is $2 billion, then the weight of debt would be 25% ($500 million / $2 billion) and the weight of equity would be 75% ($1 billion / $2 billion).
6. Calculate the WACC: Finally, use the cost of debt, cost of equity, and the respective weights to calculate the weighted average cost of capital (WACC) using the following formula:
WACC = (Weight of debt * Cost of debt) + (Weight of equity * Cost of equity)
By plugging in the values determined in steps 3, 4, and 5, you can calculate GE's WACC.
Note: It is important to consider that WACC is a theoretical calculation that represents the average cost of all capital invested in a company. The actual WACC may vary due to factors such as market conditions, company performance, and financial policies.