The Weighted Average Cost Of Capital

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Introduction AGL Energy is an Australian company providing energy products and services. It is involved in the generation and retailing of electricity and is the “largest ASX listed owner, operator and developer of renewable energy generation in the country” (AGL Energy Ltd., 2016). This assignment will calculate the Weighted Average Cost of Capital of AGL Energy Ltd and gearing, as well as analysing the capital structure of the company. Through this, recommendations can be given to the firm to increase and better manage capital and how it is used. The Weighted Average Cost of Capital (WACC) is a calculation of a firm 's cost of capital. It is the average costs of debt and equity financing, each of which is weighted by its proportional…show more content…
Therefore, the result of the WACC can be increased or decreased by altering these results. Weighted Average Cost of Capital Result The Weighted Average Cost of Capital is for AGL is in the 2015 financial year is approximately 6.28%. While 6.28% WACC is slightly high, the overall average for the utilities companies have high WACC, AGL is in the average. A high weighted average cost of capital is indicative of higher risk associated with the company. As seen in IPART’s (2016) Review of the Weighted Average Cost of Capital is is shown for five of the utilities industries in Australia. As can be seen from the figures below as AGL is both an electricity retailer and generator and therefore fits into both categories. While electricity retailing is slight higher at 6.8% WACC, electricity generation is not much smaller at 6.0% (IPART, 2016). Therefore, these two can be averaged to give approximately 6.4%. This means that AGLs Weighted Average Cost of Capital result of 6.28% is on par with the industry averages. This result shows that AGL has an adequate capital structure which gives a good Weighted Average Cost of Capital. Investors may often use WACC as an indicator of whether or not an investment is worth pursuing. This result shows indicates the company is financially stable and is not considered not risky to potential investors. There are many factors that can affect the result of the Weighted Average Cost of Capital. This can include
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