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DR. HAKALA HAS MADE AN ERROR IN THE CALCULATIONS OF WACC
Refer to Exhibit Rebut-19.1 [an attachment in Sledge’s
rebuttal report] and you will see the correct formula for
WACC. While Dr. Hakala has correctly written the formula on
his p. 20, he does not compute it correctly.
CORRECT CALCULATIONS FOR WACC.
Cost of debt 9.50 x (1 - .38) = 5.89
This is the cost of
debt after taxes
Weighed [sic] cost of debt 5.89 x .0928 = 0.55
+ Weighed [sic] cost of equity 15.06 x .9072 = 13.66
= WACC 13.66
As this excerpt shows, Sledge failed to add together the
weighted cost of debt and the weighted cost of equity in his
calculation. The corrected WACC, according to the values Sledge
proposed, is 14.21 percent for 1995 and 14.82 percent for 1996,
amounts greater than what Hakala had determined. Thus, while
Sledge correctly noted one of Hakala’s mathematical errors,
Sledge’s proposed solution leads to (or would have led to, if
Sledge had carried the analysis out) reasonable compensation
conclusions that are less than Hakala’s conclusions.
As we noted supra, Hakala used 11.70 percent as the debt-
equity ratio in calculating the relative weights to be given to
debt capital and equity capital. He did not give us any source
for his statement that this is “the relative importance of debt
and equity in the typical firm’s capital structure.” (Emphasis
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