Gates Industrial WACC %

Gates Industrial WACC % Calculation

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.

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, Gates Industrial's market capitalization (E) is $4674.009 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 & Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As of Dec. 2020, Gates Industrial's latest two-year average Short-Term Debt & Capital Lease Obligation was $44.4 Mil and its latest two-year average Long-Term Debt & Capital Lease Obligation was $2904.05 Mil. The total Book Value of Debt (D) is $2948.45 Mil.
a) weight of equity = E / (E + D) = 4674.009 / (4674.009 + 2948.45) = 0.6132
b) weight of debt = D / (E + D) = 2948.45 / (4674.009 + 2948.45) = 0.3868

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 1.56000000%. Please go to Economic Indicators page for more information. Please note that we use the 10-Year Treasury Constant Maturity Rate of the country/region where the company is headquartered. If the data for that country/region is not available, then we will use the 10-Year Treasury Constant Maturity Rate of the United States as default.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Gates Industrial's beta is 1.83.
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 = 1.56000000% + 1.83 * 6% = 12.54%

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. 2020, Gates Industrial's interest expense (positive number) was $140.8 Mil. Its total Book Value of Debt (D) is $2948.45 Mil.
Cost of Debt = 140.8 / 2948.45 = 4.7754%.

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 -138.315%.

Gates Industrial's Weighted Average Cost Of Capital (WACC) for Today is calculated as:

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

Gates Industrial  (NYSE:GTES) WACC % Explanation