WACC of Aurizon: 7.72%

Was reading the AFR as usual, and discovered an article about QLD rail (now known as Aurizon), specifically the WACC estimate. Weighted average costs of capital are important in Government regulation as most regulations allow monopolies to earn at least their WACC in regards to prices. So the higher the WACC, the more the monpoly can charge.

Aurizon believe their WACC is 8.17%, Queensland Resources Council (a lobby group for miners who pay to use the trains) believe it is 5.6%. You know what, I recon it is right in the middle. Lets see.

Formula for the WACC is usually the (weighted interest rate of borrowings)*(1-TaxRate)*(% of Debt on Capital) + (Cost of Equity Capital)*(% of Equity on Total Capital).

Firstly, from the Annual report: Average weighted interest rate of Aurizon borrowings over the last 2 years = 0.055.
Tax Rate = 0.3 (Australian Company tax rate)
Average Borrowings over the last two years (from 2013 Annual report) = $1.84 Billion
Average Equity Shares Outstanding over last two years (from 2013 Annual Report) = 2.348 Billion
Average Share Price over the last two years (From Yahoo Finance) ($3.78)
Therefore Equity total = $8.878 Billion

Total Capital = 10.78 Billion (17% debt, 83% equity). Based on this, WACC is likely to be on the higher side (as Equity is more expensive than debt)

Calculating the cost of Equity. The adjusted Beta of Aurizon (based on last 2.5 years of Aurizon and ASX200 returns) = 0.7262

Risk Free rate of 0.0382 and Market risk premium of 0.0352 already calculated on this blog
Using CAPM formula, this gives us a rate of return of 0.0637. Add on an average dividend yield over the last two years of 2.1%, gives you a cost of equity capital being 0.0847.

So putting all this info into the WACC formula gives you a grand WACC of Aurizon being 0.07721 (or 7.721%)

So how does this compare to those original forecasts. Well, no doubt that Aurizon has put on a hefty 450 basis points onto their estimate. But QRC would be getting an absolute bargain with their estimate of 5.6% (or a 2.1% discount). Go back to Finance school guys.