Brian Feroldi on LinkedIn: WACC Cheat Sheet What is the Weighted Average Cost of Capital… | 43 comments (2024)

Easy way to understand how to calculate WACC

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WACC Cheat SheetWhat is the Weighted Average Cost of Capital (WACC)?

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Very useful cheat sheet for understanding the WACC. Thank you Brian Feroldi!

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Here's how to calculate the all-important Weighted Average Cost of Capital (WACC), or the discount rate I used to discount all of my future cash flows in any type discounted cash flow (DCF) financial analysis. Commonly used for evaluating the value of large capital investment projects and mergers & acquisitions (M&A) projects.

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Let's take a closer look at this headline and focus on one word: EBITDA positive. 🧐 This term is often used by companies to conceal their true financial figures. 🕵️♂️🔍 What is EBITDA? It stands for Earnings Before Interest, Tax, Depreciation, and Amortization. 📊 Imagine a company reporting revenue of 💲100 crores and operating expenses of 💲40 crores. That appears to be an earnings margin of 💲60 crores, which sounds impressive, right? 💯💡 However, here's the catch: EBITDA doesn't account for certain crucial factors. For instance, if the company has acquired significant debt and is paying interest on it monthly, that expense is excluded from EBITDA calculations. 📉 Additionally, what about the company's assets? Over time, they depreciate, and the company will have to allocate funds for their replacement. 🏢🔎 So, instead of solely relying on EBITDA figures, it's important to consider other metrics like net profit and profit after taxes when analyzing a company's financial health. 💼📈📌 Remember, don't let EBITDA positive fool you—always dig deeper! 💪🔍#Finance #EBITDA #CompanyAnalysis #FinancialMetrics

1/100 Days of Finance Terminologies📊 Exploring EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization 📊EBITDA, a key financial metric, offers a lens into a company's operational prowess by excluding non-operating expenses like interest, taxes, and certain non-cash costs such as depreciation and amortization. 🚀This metric serves as a powerful tool for comparing the core operational performance of different companies, making it especially valuable in industries with substantial capital expenditures or significant asset depreciation.Remember, while EBITDA provides valuable insights, a holistic financial analysis considers various metrics for a comprehensive understanding of a company's financial landscape. 💼💡 #FinanceInsights #EBITDA #FinancialMetrics #BusinessPerformance

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The pivotal concept in financial modeling is the Weighted Average Cost of Capital (WACC). Let's delve into the definition and explore the process of calculating WACC. 👉 WACC stands for Weighted Average Cost of Capital. It is a financial metric that represents the average cost a company faces in raising capital to finance its operations. WACC takes into account the cost of both debt and equity, weighting them based on their proportion in the company's capital structure. 👉 The formula for calculating WACC is:WACC = (Wd)[kd(1 − t)] + (Wps)(Kps) + (Wce)(Kce) where:➡ kd = The rate at which the firm can issue new debt. This is the yield to maturity onexisting debt. This is also called the before-tax component cost of debt.➡ kd(1 − t) = The after-tax cost of debt. Here, t is the firm’s marginal tax rate. The after-tax component cost of debt, kd(1 − t), is used to calculate the WACC.➡ Kps = The cost of preferred stock.➡ Kce = The cost of common equity. It is the required rate of return on common stock and is generally difficult to estimate.➡ Wd = percentage of debt in the capital structure➡ Wps = percentage of preferred stock in the capital structure➡ Wce = percentage of common stock in the capital structure 👉 In simpler terms, WACC considers the cost of raising money from both equity investors and debt holders. The weights assigned to each component (equity and debt) are determined by their respective proportions in the company's overall capital structure. 👉 WACC is commonly used in financial valuation and analysis, such as in discounted cash flow (DCF) calculations, to determine the appropriate discount rate for future cash flows. The idea is that the WACC represents the average rate of return the company must provide to satisfy all its investors.#financialanalysis #financialmodeling #fundamentalanalysis #WACC #costofcapital #DCF #valuation #financematters #financeinsights

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❎#EBITDA, while a commonly used metric in M&A transactions, has its limitations as it excludes crucial financial elements such as #interest, #taxes, #depreciation, and #amortization. This omission can mask a company's true #financial health, making it important to explore alternative metrics like Adjusted EBITDA, Operating Cash Flow, Free Cash Flow, Economic Value Added, and Free Cash Flow to better understand a company's financial performance in a more comprehensive manner.The alternatives (with the formulas), nicely decoded by Oana Labes, MBA, CPA in her infographic.💠#Adjusted EBITDA:Adjusted EBITDA is a good way to measure profitability as it excludes certain non-recurring expenses or one-time charges, providing a more accurate picture of the company's ongoing operational performance.💠#Operating Cash Flow:Operating Cash Flow is a good alternative to EBITDA because it reflects the actual cash generated by the company's core operations, accounting for changes in working capital and cash flow from regular business activities.💠#FreeCashFlow to the #Firm (FCFF):FCFF is a reliable metric as it considers not only operational cash flow but also subtracts capital expenditures and interest expenses, providing a clearer indication of the company's ability to generate cash for all stakeholders.💠#FreeCashFlow to #EquityHolders (FCFE):FCFE is a better profitability measure for equity investors as it starts with FCFF and deducts debt-related expenses, which is useful for assessing the cash available to shareholders after debt obligations.💠#Economic Value Added (EVA):EVA is a good alternative metric as it factors in the cost of capital, ensuring that a company's profitability measurement considers the opportunity cost of investing in the business. It helps assess whether a company is generating returns above its cost of capital, indicating true value creation.

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📊💼 𝐔𝐧𝐥𝐨𝐜𝐤𝐢𝐧𝐠 𝐭𝐡𝐞 𝐏𝐨𝐰𝐞𝐫 𝐨𝐟 𝐄𝐁𝐈𝐓𝐃𝐀: 𝐘𝐨𝐮𝐫 𝐄𝐬𝐬𝐞𝐧𝐭𝐢𝐚𝐥 𝐆𝐮𝐢𝐝𝐞🔍 Understanding EBITDA:EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a measure of core profitability.It helps assess a company's cash profit generated by operations.💡 Why EBITDA Matters:Provides a clear view of operational efficiency by excluding non-operating expenses.Widely used in financial analysis, M&A transactions, and valuation.🛠️ How to Calculate EBITDA:EBITDA = Net Income + Taxes + Interest Expense + Depreciation & amortization Or EBITDA = Operating Income + D&A🌟 Key Takeaways:EBITDA is a valuable tool, but it's not the only metric to consider.Use it alongside other financial indicators for a comprehensive analysis.Remember, while EBITDA is insightful, it's not a one-size-fits-all solution. #EBITDA #Finance #Investment #BusinessInsights

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𝗘𝗕𝗜𝗧𝗗𝗔 is a financial metric that shows how much money a company makes from its operations, before taking into account certain expenses like interest, taxes, and the cost of maintaining its assets. It's like looking at a company's profits from selling its products or services, without considering the impact of these other expenses. This metric is often used to evaluate a company's overall financial health and to compare its performance to other similar companies. However, it's important to remember that EBITDA is just one of many financial metrics used to evaluate a company's performance, and should be used in conjunction with other measures to get a more complete picture.#EBITDA #Finance #BusinessMetrics

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