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Someone mentioned that a common mistake that happens when "a company estimates the WACC is using...

Someone mentioned that a common mistake that happens when "a company estimates the WACC is using the coupon rate on a company's existing debt as a pre-cost of debt". Companies that are not experienced in accounting or finance could easily use the wrong data to estimate the WACC. It is hard to use any type of estimation calculation because it will never be perfect as one can not predict the future. The use of the correct information is extremely important. What do you think a company can do to ensure it is always using the most accurate data for the calculations?

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Answer #1

AFter tax cost of debt needs to be considered for calculatiln of WACC. Also the cost of debt to be considered is not coupon rate on the bonds of the compnay but it is the current interest rate in the market for similar bonds.

Hence we need to find out the current interest rates on bonds in the market having simialr characteristics to the bond which the company has. This will ensure that the WACC calculated will be the most accurate one. Also as the interest provides a tax shield to the company hence we need to find out the after tax cost of debt.

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