WACC incl. pension liabilities


2009 morning paper / question 4a:

Why do we calculate WACC without using the standard formula adjusted for pension liabilities. It seems to me that we calculate here the cost of equity and claim that its WACC.

Many thanks for help

βtotal = βequity * equity / (equity + debt + pensionassets) [+ βdebt * weight --> ignore as βdebt=0]

βpensionassets = βpensionequityassets * pensionequityassets / (pensionequityassets + pensiondebtassets)

βoperatingassets = βtotal - βpensionassets

Ok, this part I get. As we have B_operating_assets we can us it to get the cost of equity. However, the problem is that the answer says:

WACC = Rf + B_operating_assets*ERP

I was expecting something like: WACC = E/(E+D)*Re+D/(E+D)*Rf

Would really appreciate your help.


WACC = E/(D+E) * E® + D/(D+E) * Rf Adding and subtractting +E-E in the numerator of 2nd term you have WACC = E/(D+E) * E® + (D+E)/(D+E) * Rf - E/(D+E) * Rf = Rf + E/(D+E) * (E® - Rf) E® = Rf + βequity * Risk premium WACC = Rf + E/(D+E) * βequity * Risk premium = Rf + βoperatingassets * Risk premium

Remember, with pension assets βoperatingassets is not just E/D+E * βequity, but βtotalassets - βpension assets. See above.

is the answer 7.68% w/ op. asset beta of 0.52? I just did it on scratch paper and can’t find the answer key. thx in advance.

The equations I gave are little off. My observation is that total asset beta is calcuated at liabilities side and is split by weights between operating and pension assets on the assets side.

Thing to remember is on liablities side pension liablities have zero beta. But on assets side pension assets have non-zero beta.