Financial Metrics & Modelling
Weighted Average Cost of Capital (WACC)
Summary
Weighted average cost of capital (WACC) combines expected returns required by debt and equity capital providers using consistent market-value weights.
Why this matters in ship finance
A company-level WACC is often a starting point for unlevered cash-flow appraisal but may not fit a single risky vessel or unfamiliar fuel technology.
The concept
The conventional after-tax formula weights cost of equity and after-tax cost of debt. Tax shields depend on actual tax position and jurisdiction; tax-exempt or tonnage-tax structures require adjustment.
How it is used in practice
Estimate risk-consistent equity and debt costs, capital weights and applicable tax treatment, then test whether project exposure differs from the group’s existing business.
Analytical formulation
Where relevant.
Illustrative worked example
Illustration: 40% equity at 14% and 60% debt at 6%, with an applicable 25% tax benefit, imply WACC of 8.3%.
Practical issues
Do not discount FCFE at WACC, or treat an observed loan coupon as the entire weighted capital cost. Nominal and real rates must match cash-flow inflation.
How ShipFinance.ai uses this concept
ShipFinance.ai can structure this topic around a transparent, auditable record of formula inputs, time basis, scenario assumptions and debt/equity cash-flow reconciliation. A useful decision output is a base case beside a clearly labelled alternative case, with input sources, effective dates and the assumptions responsible for any change in financing capacity.
Key takeaways
- Weighted average cost of capital (WACC) combines expected returns required by debt and equity capital providers using consistent market-value weights.
- Estimate risk-consistent equity and debt costs, capital weights and applicable tax treatment, then test whether project exposure differs from the group’s existing business.
- Do not discount FCFE at WACC, or treat an observed loan coupon as the entire weighted capital cost.