Sunday, January 5, 2014

Time Warner Cable (TWC) WACC

In this post we will calculate the weighted average cost of capital, or WACC, for Time Warner Cable.  As mentioned in my previous post, we calculated TWC's CAPM using data from ValueLine and Damodaran.

In this post we will also use TWC's financial documents, specifically their 10-K, retrieved from the SEC's Edgar site.  I'm using their 2013 filings which means our data is a year old.  More current filings could be used to get more accurate picture, but would require some amount of extrapolation.

A company's WACC is their realized, after-tax cost of financing activities.  A company's WACC will vary depending upon their access to the debt and equity markets and the mix of debt to equity.

Generally speaking, debt is cheaper than equity.  This can lead to companies with seemingly high debt ratios having a lower WACC.  It's important to note that WACC, while used in many measurements, is the marginal cost for a firm to borrow the next dollar.  This is one of the reasons that CAPM uses the current Treasury rate rather than the historical numbers.

At the end of 2012, TWC was carrying $24 billion in debt on their balance sheet.  Using ValueLine's numbers for outstanding shares of 283 million (vs. the 315 or so on the 2013 10-K), with a current stock price of $134.17  their market cap is ~$38 billion.

A company's WACC is calculated by adding the debt and equity (market cap in this case) and then dividing both the debt and and the equity by that sum.  This provides the percentage amount that debt and equity constitute of total capital.  This percentage amount is then multiplied by the cost of that segment and then added.

Using round numbers for TWC, we have the following:

Debt           $24 billion (from the balance sheet)
Equity        $38 billion (used ValueLine for outstanding shares and stock price)
Total:         $62 billion in total capital

% of debt:    24 / 62 = 39%
% of equity: 38 / 62 = 61%

Cost of equity is CAPM = 7.54%
Cost of debt = 5.887% (taken from the 10-K... could be calculated as well from 10-K information)
We want the after tax cost of debt to account for the tax savings so the cost of debt equals the After Tax Rate * (1 - Tax Rate) or, 5.887% * (1 - 40% ) = 3.53%.

Debt: 3.5% * 39% = 1.38%
Equity: 7.45% * 61% = 4.6%

WACC = 5.98%

This is Time Warner Cables marginal cost for every additional dollar financed.

In the next post we'll use the WACC to help determine the NPV of future cash flows.


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