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GuruFocus has detected 6 Warning Signs with MGM Resorts International $MGM.
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MGM Resorts International (NYSE:MGM)
WACC %
9.17% (As of Today)

As of today, MGM Resorts International's weighted average cost of capital is 9.17%. MGM Resorts International's return on invested capital is 10.25% (calculated using TTM income statement data). MGM Resorts International generates higher returns on investment than it costs the company to raise the capital needed for that investment. It 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.


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, MGM Resorts International's market capitalization (E) is $19454.950 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 Mar. 2017, MGM Resorts International's latest two-year average Short-Term Debt was $168.4085 Mil and its latest two-year average Long-Term Debt was $12673.7655 Mil. The total Book Value of Debt (D) is $12842.174 Mil.
a) weight of equity = E / (E + D) = 19454.950 / (19454.950 + 12842.174) = 0.6024
b) weight of debt = D / (E + D) = 12842.174 / (19454.950 + 12842.174) = 0.3976

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 2.15000000%. 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. MGM Resorts International's beta is 1.59.
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 = 2.15000000% + 1.59 * 6% = 11.69%

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, MGM Resorts International's interest expense (positive number) was $694.773 Mil. Its total Book Value of Debt (D) is $12842.174 Mil.
Cost of Debt = 694.773 / 12842.174 = 5.4101%.

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 1.2%.

MGM Resorts International'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)
=0.6024*11.69%+0.3976*5.4101%*(1 - 1.2%)
=9.17%

* 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, MGM Resorts International's weighted average cost of capital is 9.17%. MGM Resorts International's return on invested capital is 10.25% (calculated using TTM income statement data). MGM Resorts International generates higher returns on investment than it costs the company to raise the capital needed for that investment. It 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.


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.

MGM Resorts International Annual Data

Dec07Dec08Dec09Dec10Dec11Dec12Dec13Dec14Dec15Dec16
WACC 13.086.4710.1113.3811.728.9910.355.365.699.39

MGM Resorts International Quarterly Data

Dec14Mar15Jun15Sep15Dec15Mar16Jun16Sep16Dec16Mar17
WACC 5.365.485.064.115.695.605.426.079.398.79
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