4.4.2 Calculation of the WACC for the Different
Specialization
Table 27 presents the results of the different leverage for
each specialization. This leverage was be
used in the calculation of the
estimation of the WACC for each specialization. Other financial
information
are presented in this table, such as the net salary per capita (in
€/month) which can be
compared to the SMIC which is around 1 029 € net per month
for the time period 2006-2010. Therefore, the average cattle farmers in
Isère earn less than the minimum salary in France.
The average leverage is really similar for each
specialization, around 50%, but the debt coverage on the contrary is different
depending on the specialization. The grain farmers have a debt coverage of
3.16, which is really different than the 2.08 for the cattle farmers. It shows
again that cattle farming was the less profitable specialization in
Isère for 2006-2010.
|
Specialization
|
Leverage
|
Net salary per capita
|
EBITDA/turnover
|
Debt coverage*
|
|
Dairy
|
52.7%
|
1 230 €
|
41%
|
2.44
|
|
Cattle farming
|
49.5%
|
1 015 €
|
42%
|
2.08
|
|
Grain
|
49.9%
|
1 478 €
|
46%
|
3.16
|
|
Diversified
|
54.6%
|
1 277 €
|
35%
|
2.49
|
|
Weighted average
|
52.8%
|
1 279 €
|
39%
|
2.54
|
Table 27: Characteristic of each specialization in
Isère *EBITDA/total annuity
Regarding the WACC, Table 28 presents the details of the
calculation and the range of WACC for each specialization. First, the cost of
debt is really low for farmers in France (see Appendix 14 page 115).
The first element which could explain this fact is that loans are
guaranteed by the assets in the farming business, reducing therefore the risk
for the bank and the interest rate as well. The other element which
can explain this fact is that the first bank in agriculture is the
Crédit Agricole, which is really linked with the agricultural sector.
His regional boards are mostly composed with farmers.
One could object that this low cost of debt doesn't reflect
the real risk associated with the debt in Agriculture because of the
specificity of this sector. However, the rate bankruptcy is really low: 1.6%o
in Rhone Alpes (Coface, 2011). This element is linked with the culture of the
French farmers. Going bankrupt is clearly not conceivable for most of them, and
we can put this statement in relation with their level of salary. As
presented in table 27, cattle farmers on average earn less than the minimum
salary in France, but they maintain their activity and continue to pay their
annuities. From an economical perspective, this attitude is totally
counter-productive, because selling the farm and getting whatever job would
generates higher returns. This fact illustrates the farmers' attachment
to their farm and may explain the really good interest rates they obtain from
their banks.
|
Specialization
|
rE. E/V (low)
|
rE. E/V (high)
|
rD.(1-Tc).D/V
|
WACC (low an high range)
|
|
Dairy
|
7,0%
|
10,3%
|
1,3%
|
8,3%
|
11,7%
|
|
Cattle
|
7,4%
|
11,0%
|
1,2%
|
8,6%
|
12,2%
|
|
Grain
|
6,6%
|
9,6%
|
1,2%
|
7,7%
|
10,8%
|
|
Diversified
|
5,9%
|
8,7%
|
1,3%
|
7,2%
|
10,0%
|
|
Mean
|
6,2%
|
9,1%
|
1,3%
|
7,4%
|
10,3%
|
Table 28: WACC estimation for each specialization
(leverage is based on table 27)
The cost of equity is higher for dairy and cattle farms (see
Table 28), linked with the higher beta observed for these specializations.
Finally, the WACC range for the average farm in Isère is [7.4% ; 10.3%].
This method gives lower results than the method proposed by the tax
authorities. However, for some specializations, the range is almost similar,
particularly for cattle and dairy production.
Another element has to be considered. As a matter of fact, the
WACC methodology takes into
account the leverage, which reduces the overall
cost of capital. Table 29 presents the WACC for the
farms of the group 5, for which the leverage range is 0-20%. Here
the WACC increases tremendously, reaching almost 20% for the higher estimation
for cattle and dairy production.
|
Specialization
|
rE. E/V (low)
|
rE. E/V (high)
|
rD.(1-Tc).D/V
|
WACC (low and high range)
|
|
Dairy
|
13,2%
|
19,6%
|
0,3%
|
13,5%
|
19,9%
|
|
Cattle
|
13,2%
|
19,6%
|
0,2%
|
13,5%
|
19,9%
|
|
Grain
|
11,8%
|
17,3%
|
0,2%
|
12,0%
|
17,5%
|
|
Diversified
|
11,8%
|
17,3%
|
0,2%
|
12,0%
|
17,5%
|
|
Mean
|
11,8%
|
17,3%
|
0,2%
|
12,0%
|
17,5%
|
Table 29 : WACC estimation for each specialization for
group 5 (0 to 20% leverage)
Group 2 (60-80% leverage) was usually the best group in terms
of results (see parts 4.2.2 and 4.2.3). Regarding this group, the WACC falls to
lower levels, between 5.6% and 7.4% for the average farm in Isère. This
massive reduction of the WACC is due to the really low cost of debt observed in
agriculture in France. The level is still higher for cattle and dairy farms of
course, pushed by the higher beta for this production. The WACC for this group
of leverage is closer to the actualization rate used by practitioners
(2.5-4.5%), but still significantly higher.
|
Specialization
|
rE. E/V (low)
|
rE. E/V (high)
|
rD.(1-Tc).D/V
|
WACC (low and high range)
|
|
Dairy
|
4,4%
|
6,5%
|
1,8%
|
6,2%
|
8,3%
|
|
Cattle
|
4,4%
|
6,5%
|
1,7%
|
6,1%
|
8,2%
|
|
Grain
|
3,9%
|
5,8%
|
1,6%
|
5,5%
|
7,4%
|
|
Diversified
|
3,9%
|
5,8%
|
1,7%
|
5,6%
|
7,4%
|
|
Mean
|
3,9%
|
5,8%
|
1,7%
|
5,6%
|
7,4%
|
Table 30: WACC estimation for each specialization for
group 2 (60 to 80% leverage)
As presented in the previous sections, the signs of financial
distress are strong in group 1 (leverage higher than 80%), and even for the
group 2. Therefore, the real optimal WACC is maybe closer to the
results presented in Table 28 for leverages around 50%. Farming
consultants should use these ranges of WACC to determine their actualization
rates in their feasibility studies.
|
|
