Determine The WACC For Exxon Mobil Using Research Data

Determine the WACC for Exxon Mobil Using Research Data and Financial Principles

Your task is to determine the WACC for Exxon Mobil using known financial concepts and research data. The report should include your calculated WACC, sources of your data, and a discussion of your confidence in the result, including any limitations or assumptions made during the process. All elements can be embedded within an Excel file; for this response, a comprehensive, stand-alone paper is provided below.

Paper For Above instruction

The Weighted Average Cost of Capital (WACC) is a fundamental measure used by firms to evaluate investment opportunities, simplify valuation models, and assess financial health. For Exxon Mobil, accurately estimating WACC involves integrating market data, firm-specific financial metrics, and sound financial theories. This paper details the methodology, sources, and assumptions utilized in calculating Exxon Mobil’s WACC, complemented by an assessment of confidence levels and potential limitations.

Introduction

Understanding a firm’s WACC is critical in corporate finance because it reflects the average rate a company must pay its capital providers—both debt and equity—to finance its assets (Damodaran, 2020). The WACC combines the cost of equity and the after-tax cost of debt, proportioned by their respective market values in the firm’s capital structure. For Exxon Mobil, a leading multinational oil and gas corporation, estimating WACC requires a careful analysis of current market data, financial statements, and industry conditions.

Step 1: Calculating the Cost of Equity (r_i)

The cost of equity is estimated via the Capital Asset Pricing Model (CAPM), which uses the formula:

r_i = r_f + β_i * (RMkt - r_f)

Where:

- r_f is the risk-free rate,

- β_i is the beta of Exxon Mobil,

- (RMkt - r_f) is the market risk premium.

Data Sources:

- Risk-Free Rate (r_f): The yield on 10-year US Treasury bonds, obtained from the Federal Reserve or financial data platforms such as Yahoo Finance. As of the latest data, the 10-year Treasury yield stands at approximately 3.75% (US Treasury, 2023).

- Beta (β_i): Sourced from Yahoo Finance, Exxon Mobil’s beta is approximately 1.15, reflecting industry volatility relative to the broader market (Yahoo Finance, 2023).

- Market Risk Premium (MRP): Based on Damodaran’s implied equity risk premium estimate, recent values suggest approximately 6.0% (Damodaran, 2023). This aligns with historical averages ranging between 4-6%.

Calculation:

Using the values above:

r_i = 3.75% + 1.15 * (6.0%) = 3.75% + 6.9% = 10.65%

Step 2: Estimating the Cost of Debt (r_D)

The cost of debt is derived from Exxon Mobil’s existing debt securities, specifically the yield to maturity (YTM) on its outstanding bonds. Data can be sourced from FINRA or Morningstar, which provide bond quotes and yields.

- According to recent bond data, Exxon Mobil's long-term corporate bonds with a similar maturity (~10 years) have a YTM of approximately 4.2% (FINRA, 2023).

- Since interest expenses are tax-deductible, the after-tax cost of debt (r_D) is:

r_D(after tax) = YTM * (1 - Tax Rate)

Given the statutory corporate tax rate of 21% (IRS, 2023):

r_D = 4.2% * (1 - 0.21) ≈ 3.32%

Step 3: Determining Capital Structure Weights

- Market value of equity (E): From Yahoo Finance, Exxon Mobil has a market capitalization of approximately $420 billion (Yahoo Finance, 2023).

- Market value of debt (D): Total debt can be approximated via Exxon Mobil’s latest 10-K filings, which list total debt at roughly $60 billion (ExxonMobil, 2023).

- The firm’s capital structure weights:

E / (E + D) ≈ 420 / (420 + 60) ≈ 0.875

D / (E + D) ≈ 60 / (420 + 60) ≈ 0.125

Step 4: Calculating WACC

Applying the formula:

WACC = (E / (E + D)) r_i + (D / (E + D)) r_D

- WACC ≈ 0.875 10.65% + 0.125 3.32%

- WACC ≈ 9.32% + 0.42% ≈ 9.74%

Discussion and Confidence

The estimate of approximately 9.74% provides a reasonable approximation based on current data and accepted financial methodologies. However, some caveats apply:

- The beta used is an estimated market risk measure; beta can fluctuate over time due to market and company-specific factors.

- Bond yields are subject to market conditions and may not perfectly reflect Exxon Mobil’s actual cost of debt, especially considering upcoming bond issuances or refinancing.

- The market values may fluctuate, especially in volatile markets affecting capital structure weights.

- The choice of risk premium (6%) aligns with Damodaran’s implied premium but can vary based on subjective assessments.

- Tax considerations assume the statutory corporate rate applies uniformly, neglecting potential variations for different jurisdictions or tax strategies.

Despite these limitations, the approach employs standard financial modeling techniques with transparent data sources. Continuous updates and sensitivity analyses should enhance the robustness of WACC estimates.

References

• Damodaran, A. (2023). Equity Risk Premium & Cost of Capital. Damodaran Online. Retrieved from https://pages.stern.nyu.edu/~adamodar/
• ExxonMobil. (2023). 2022 Annual Report. Retrieved from https://corporate.exxon.com/investor-relations/financial-information/annual-report
• FINRA. (2023). Bond Data & Yields. Financial Industry Regulatory Authority. Retrieved from https://finra.org
• IRS. (2023). Corporate Tax Rate Schedules. Internal Revenue Service. Retrieved from https://www.irs.gov
• US Treasury. (2023). Daily Treasury Yield Curve Rates. U.S. Department of the Treasury. Retrieved from https://home.treasury.gov
• Yahoo Finance. (2023). Exxon Mobil Corporation (XOM). Retrieved from https://finance.yahoo.com