Interview Question

Corporate Development Analyst Interview(Student Candidate) Houston, TX

What do you think is the WACC of Halliburton?

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So the equation for WACC is %D*Dc*Tax Shield + %E+Ec
And in calculating this there a couple of factors involved here: the capitalization, the cost of debt, the tax rate, and the cost of equity

    Capitalization: I know from your 10-K that you have ~3.8 Bn in debt, and your mkt cap is ~35 bn. For the sake of mental math lets say that you have 4 bn in debt, and 40bn in total capital. Therefore you would be 10% debt financed, and 90% equity financed.

As for the debt: I saw that you recently priced some 10 yr bonds with an interest rate of 3.25%. So I will assume the cost of debt is 3.25%. Multiply that by the 10% that your firm’s financing is attributable to debt, and that number is already less than 1%. Then you need to multiply it by the tax shield, which brings me to the next stage

The Tax rate: I saw on your 10-K that you were taxed $850mm out of 2.6 bn in Operating income before taxes. That’s roughly 1/3. So I will assume a 33% corporate tax, which would mean the tax shield would equal 67%. When you multiply the tax shield and the previous debt associated number we arrived at, this number would be tiny. To be exact we said 10% of 3.25% would be less than a percent, .003, that times .67 would be something like .2% for the debt portion of the equation.

As for the Equity: we already established that the firm is 90% capitalized by equity. So the only thing left to do is figure out the Cost of Equity. I would do this by using CAPM. Risk free rate plus the product of beta and market risk premium. Since I used the 10yr bonds as the cost of debt earlier, I will reference the 10yr US Treas as a the risk free rate. It is currently yielding 2%. I saw on Bloomberg that your firm has a beta of 1.58, or call it 1.6. the only thing left in the CAPM is the market risk premium. Now that can be an arbitrary #, but I know that the Oilfield services etf XES has a return of 8%. Therefore 8-2=6%. SO- 1.5x6= 9, lets call it 10. Add the riskfree rate of 2%, and the CAPM would be 12%.

So 12% x 90% ~ 11%. Then add that small percentage attributable to the cost of debt, and I bet that Halliburton’s WACC is somewhere between 11.5-12.5%

Interview Candidate on Jan 6, 2012

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