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GuruFocus has detected 3 Warning Signs with First Majestic Silver Corp $AG.
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First Majestic Silver Corp (NYSE:AG)
WACC %
5.76% (As of Today)

As of today, First Majestic Silver Corp's weighted average cost of capital is 5.76%. First Majestic Silver Corp's return on invested capital is -4.13% (calculated using TTM income statement data). First Majestic Silver Corp earns returns that do not match up to its cost of capital. It will destroy value as it grows.


Definition

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Generally speaking, a company's assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.

WACC=E/(E + D)*Cost of Equity+D/(E + D)*Cost of Debt*(1 - Tax Rate)

1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, First Majestic Silver Corp's market capitalization (E) is $1272.150 Mil.
The market value of debt is typically difficult to calculate, therefore, GuruFocus uses book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average Short-Term Debt and Long-Term Debt together. As of Dec. 2016, First Majestic Silver Corp's latest two-year average Short-Term Debt was $31.4545 Mil and its latest two-year average Long-Term Debt was $26.204 Mil. The total Book Value of Debt (D) is $57.6585 Mil.
a) weight of equity = E / (E + D) = 1272.150 / (1272.150 + 57.6585) = 0.9566
b) weight of debt = D / (E + D) = 57.6585 / (1272.150 + 57.6585) = 0.0434

2. Cost of Equity:
GuruFocus uses Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)
a) GuruFocus uses 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is 1.72000000%. Please go to Economic Indicators page for more information.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. First Majestic Silver Corp's beta is 0.70.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. GuruFocus requires market premium to be 6%.
Cost of Equity = 1.72000000% + 0.70 * 6% = 5.92%

3. Cost of Debt:
GuruFocus uses last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.
As of Dec. 2016, First Majestic Silver Corp's interest expense (positive number) was $2.218 Mil. Its total Book Value of Debt (D) is $57.6585 Mil.
Cost of Debt = 2.218 / 57.6585 = 3.8468%.

4. Multiply by one minus Average Tax Rate:
GuruFocus uses the latest two-year average tax rate to do the calculation.
The latest Two-year Average Tax Rate is 40.19%.

First Majestic Silver Corp's Weighted Average Cost Of Capital (WACC) for Today is calculated as:

WACC=E / (E + D)*Cost of Equity+D / (E + D)*Cost of Debt*(1 - Tax Rate)
=0.9566*5.92%+0.0434*3.8468%*(1 - 40.19%)
=5.76%

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.


Explanation

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

As of today, First Majestic Silver Corp's weighted average cost of capital is 5.76%. First Majestic Silver Corp's return on invested capital is -4.13% (calculated using TTM income statement data). First Majestic Silver Corp earns returns that do not match up to its cost of capital. It will destroy value as it grows.


Be Aware

1. GuruFocus uses book value of debt (D) to do the calculation. It is simplified by adding latest two-year average Short-Term Debt and Long-Term Debt together.

2. The WACC formula discussed above does not include Preferred Stock. Please adjust if preferred stock is considered.

3. (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. GuruFocus requires market premium to be 6%.

4. GuruFocus uses last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.


Related Terms

Market Cap, Interest Expense, Short-Term Debt, Long-Term Debt


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

First Majestic Silver Corp Annual Data

Dec07Dec08Dec09Dec10Dec11Dec12Dec13Dec14Dec15Dec16
WACC 22.5916.9214.2015.0014.2517.5015.8019.349.0419.91

First Majestic Silver Corp Quarterly Data

Sep14Dec14Mar15Jun15Sep15Dec15Mar16Jun16Sep16Dec16
WACC 17.4119.3415.7015.228.959.0413.2817.240.0019.91
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