Increasing Shareholder Value by Utilizing Tax Opportunities
The WACC is a calculation of the ‘after-tax’ cost of capital where the tax treatment for each capital component is different. In most countries, the cost of debt is tax deductible while the cost of equity isn’t, for hybrids this depends on each case.
Some countries offer beneficial tax opportunities that can result in an increase of operational cash flows or a reduction of the WACC.
This article elaborates on the impact of tax regulation on the WACC and argues that the calculation of the WACC for Belgian financing structures needs to be revised. Furthermore, this article outlines practical strategies for utilizing tax opportunities that can create shareholder value.
Hybrids, Expensive Debt or Cheap Equity?
Hybrids are financial instruments that combine certain elements of debt and equity. Examples are preferred equity, convertible bonds, subordinated debt and index-linked bonds. For the issuers, hybrid securities can combine the best features of both debt and equity: tax deductibility for coupon payments, reduction in the overall cost of capital, and a strengthening of senior credit ratings.
This article describes the reasons behind the increased interest among corporates in using hybrid instruments to optimize their capital structure and the impact of hybrids on the WACC and shareholder value. It also takes a look at treatment by accountants, tax regulation and rating agencies.
Is Estimating the WACC Like Interpreting a Piece of Art?
This seven-part series, authored by Zanders consultants, provides CFOs and corporate treasurers with a better understanding of the weighted average cost of capital (WACC), which is recognized as one of the most critical parameters in strategic decision-making. The series highlights strategies to optimize the capital structure and maximize shareholder value.
This article, the first in the series, describes how to estimate the weighted average cost of capital (WACC) and the issues that need to be considered when doing so.
If companies were entirely financed with equity, there would be little difficulty in determining its cost of capital: it would be the expected return required by shareholders. Most companies, however, are not wholly financed with equity. They tend to issue a variety of financing instruments, including debt, equity and hybrids. Due to this financing mix, companies usually calculate a weighted average cost of capital (WACC).