(HELP PLEASE) weighted average cost of capital?

Question

Consolidated Statement of Income

Ford Motor Company and Subsidiaries

For the Years Ended December 31, 2007, 2006, (in millions, except per share amounts)

Sales and revenue...............2007 2006

Automotive sales..............154,379 143,249

Finacial Service revenue....18,076 16,816

Total sales and revenue..172,455 160,065

Costs and Expenses..............2007 2006

Automotive cost of sales......142,587 148,866

selling, admin., and other......21,169 19,148

Goodwill impairment................2,400

Interest expense...................10,927 8,783

Financial Service credit loss......668 241

Total costs and expense......177,751 177,038

I need to know how to figure out the weighted average cost of capital for years 2007 and 2006. If any one can show me how to figure this out I would greatly apprecaite it.

Answer 1

all you've shown is income statement data, which is not enough to calculate the cost of equity, let alone the WACC.

Cost of equity using CAPM = Risk Free Rate + Beta(Equity Risk Premium - Risk Free Rate) + Alpha

Cost of Debt = your company's borrowing rate, weighted if it has more than one loan on teh books.

WACC= (%Debt x Cost of Debt) + (%Equity x Cost of Equity)

now, we could make some assumptions to arrive at your debt to equity ratio, such as using the industry average, or some optimal figure.  You can look it up in Ibbotson's Cost of Capital Yearbook and search by industry (by SIC code).

typically you would use the market value of equity to calculate teh WACC, but you don't even provide the book value of eqity above.  we could back into the WACC or cost of equity if we knew the company's value already...we would back into them by calculating free cash flow, which divided by X = value.  so X would equal your WACC or Cost of Equity, depending on what level of cash flow you use.

there just isn't enough info provided.  period.

Answer 2

Here is a link to the formula.  It should be in your finance book as well.

http://www.investopedia.com/terms/w/wacc...