The Short Answer
[Two or three sentences a busy reader can take away.]
The Textbook Formula
The weighted average cost of capital blends the cost of equity and the after-tax cost of debt by their weights in the capital structure:
WACC = (E / V) × Re + (D / V) × Rd × (1 − t)
with the cost of equity usually taken from the CAPM: Re = Rf + β × ERP.
Where It Breaks in Nigeria
The Risk-Free Rate
[Which government yield to use, naira or dollar, and how to keep it consistent with the currency of the cash flows.]
The Equity Risk Premium
[Where the premium comes from when local market history is short and volatile, and whether to add a country risk premium.]
Beta
[Why local betas are unreliable for thinly traded stocks, and what to use instead.]
The Cost of Debt
[Using actual borrowing costs from the company's notes to the accounts rather than a generic spread.]
Worked Example
Building Up the Cost of Equity
SAMPLE DATA: illustrative values only. Replace with your own inputs.
Source: [Your sources]
View the data
| Component | Rate |
|---|---|
| Risk-Free Rate | 10% |
| Equity Risk Premium | 6% |
| Country Premium | 3% |
| Cost of Equity | 19% |
| Input | Value | Source |
|---|---|---|
| Risk-Free Rate | [x]% | [x] |
| Equity Risk Premium | [x]% | [x] |
| Beta | [x] | [x] |
| Pre-Tax Cost of Debt | [x]% | [x] |
| WACC | [x]% | Calculated |
Key Points
- [Point One]: [Explanation.]
- [Point Two]: [Explanation.]