Introduction
The weighted average cost of capital for a firm shows the minimum costs associated for a company in respect to the share price of the company. The two main components of the weighted average cost of capital is the weight and costs associated with each of the capital sources such as the equity financing and the debt financing. The weighted average cost of capital should be at an optimal risk and the company should optimally decide the level of equity and the level of debt financing of the company after considering the business and the financial factors of the company. The WACC for the Exxon Mobil company was derived after taking the costs and weight of each of the capital financing sources company has deployed in the operations of the company.
Discussion
WACC Analysis
The weighted average cost of capital for a firm could be derived with the help of the formula Weighted Average Cost of Capital = Weight of Equity* Required Return on Equity+ Weight of Debt* (Cost of debt * (1- Tax Rate)). The weight of equity on the other hand could be computed with the help of the formula {Return on Equity (Re) = Risk free rate of return+ Beta*(Return on Market- Risk free rate of return)}.
Cost of Equity
The cost of equity for Exxon Mobil was calculated by taking the market risk premium, the beta of stock and the prevailing 10-year US Treasury Yield. The same has been incorporated for calculating the current cost of equity for the company. The equity value for the company was around $ 194,500 stating the overall weight of equity to be around 88.85% in the overall capital structure of the company (Finance.yahoo.com 2019). The cost of equity was calculated for the company to be around 6.75%. The beta was taken at 1.04 which was the three year beta for the company and the market risk premium was taken at 4% (Corporate.exxonmobil.com 2018).
Cost of Debt
The cost of debt for Exxon Mobil in the overall capital was around 2.46% where the weightage of debt was around 11.15%. The weightage of debt was determined by taking the interest cost paid by the company on the long term borrowings of the company. The tax rate that was taken into consideration for the company was around 35%. The cost of debt for Exxon Mobil was calculated to be around 2.46% (Corporate.exxonmobil.com 2018).
Weighted Average Cost of Capital
The WACC for Exxon Mobil was calculated to be around 6.18% and the same has been derived by taking the cost of debt and equity and the relevant weightage of each (Bloomberg.com 2019).
Conclusion
The WACC for the company was found to be
optimal where the exposure of debt for the company in the form of higher debt
and leverage was found to be less. Lower amount of debt also reduces the
financial risk of the company and at the same time allows the company to take
advantage of the tax shield generated by the debt financing.
References
Bloomberg.com. (2019). BloUS Generic Govt 10 Year Yield. [online] Available at: https://www.bloomberg.com/quote/USGG10YR:IND [Accessed 15 Mar. 2019].
Corporate.exxonmobil.com. (2018). Annual Report 2017. [online] Available at: https://corporate.exxonmobil.com/-/media/Global/Files/investor-relations/annual-meeting-materials/annual-report-summaries/2017-Summary-Annual-Report.pdf [Accessed 15 Mar. 2019].
Finance.yahoo.com. (2019). Exxon Mobil Corp. [online] Available at: https://finance.yahoo.com/quote/xom/key-statistics/ [Accessed 15 Mar. 2019].
