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same point in time) also varies significantly, reflecting different risks and actual returns to equity shareholders. The formula used to calculate the annual WACNC(T) is as follows: WACC = rJCe +(Ce+P, +D)] -+r,[P, -+(C,+P,+D)]’+(1 - T)r,[D i(Ce+P, +D)] Where: rec = ce ps = D = preferred stock T = rd = corporate tax rate* interest rate paid on debt. rate of return on common equity = common stock and corporate retained earnings (Weston and Brigham 1981) debt issues = rate of return on preferred stock The data on the dollar amounts of debt and preferred and common stock are annual U.S. figures based on data from several sources. The data. on the dollar amounts of preferred (P) and common stock (C) and data on dollar values of debt (D) were taken from Moody’s. The rates associated with corporate debt are the average return on new bonds (rJ. This was also taken fiom Moody’ s. The data on the rate of return on prefemed stock (rep)were taken from the values given for preferred stock of Moody’s medium grade industrials. The return on common equity (rW)was calculated using the formula r, =div/p+g, where data on dividends (div) and dividends divided by price (div/p) were obtained from the Economic Report of the President, as was retained earnings. Thegrowthrateofdividendsisthe5-yearaveragecompoundgrowthrate. Newcommonequityequals thenewcommonstockissueplustheretainedearningsforthatyear. Thereturnoncommonequitywas calculatedusingayear-to-yearestimateofgrowth. ThetaxrateswereobtainedfromtheIRSforpertinent yearsandbrackets. TheyearlyWACNC(T)figureswerethenconvertedtoacommonyearusingtheGNP deflator. ThemeanWACNCcanalsobecalculatedwithouttheeffectoftaxes. Thiswasperformedusingthesame format as was used in the previous example. The resulting WACNC (unadjusted for taxes) was 7.06%. The choice of which WACNC (after-tax or before-tax) depends on the purpose of the analysis. As was emphasized earlier, usually after-tax cash flows should be used. The actual value of the WACNC probably lies somewhere between the after-tax and before-tax figures because utilities will pay taxes, but given deductions, credits, and so forth, the effective tax rate for an investment will rarely be equal to the percentage in the top tax bracket. *Thecorporatetaxrateincludesbothstateandfederalincometaxrates. Theeffectivetaxrate,or combined state and federal tax rate, can be calculated as Effective Tax Rate = State Tax Rate + Federal Tax Rate (1 - State Tax Rate). c-2PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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