Estimating WACC in Excel

- [Instructor] It's important to be able to put together…the different components in WACC…to understand how changes…in weighted average cost of capital,…and in particular, debt cost,…can influence a firm's bottom line,…and the risk that that company faces.…WACC is a key variable that ties together…the liability equity mix in the balance sheet…and the profit on the income statement.…I'm in the 0305 begin Excel file.…

Now, when we see a firm that has a higher credit rating,…that in turn also means that they're a less risky company.…And why are they a less risky company?…Well, it's because they tend to have greater levels of…EBIT interest coverage, meaning that their earnings…before interest and taxes more than cover the interest…expense on their debt.…A AAA firm for example, might have EBIT interest coverage…of 20 times.…What that would mean is that their earnings before interest…and taxes are at least 20 times as much…as their interest payments are.…

In contract, a firm with a single B credit rating…might only have EBIT interest coverage of 1.8 times.…