Cost of Capital

The Weighted Average Cost of Capital (WACC)

The weighted average cost of capital (WACC) is a metric that measures a company's cost to borrow money by taking into account the risks of the firm using both equity and debt. In other words is the rate that companies expect to pay in order to finance their businesses. 

Key assumptions:

• All calculations were conducted on March 27, 2024, and all data was sourced on the same date. The stock price of $179 used was of April 17, 2024. Some adjustment needed to be made to better evaluate the company.

• WACC was calculated by summing up the weight*cost of long-term debt and equity. 

• Long-term debt includes leases and the current portion of the long-term debts.

• The total value of equity was obtained by multiplying the current stock price (as of April 17, 2024, from Yahoo Finance) by the outstanding shares (obtained from the Value Line report)

• The cost of debt was obtained by subtracting the tax rate from the pre-tax cost of debt, which was acquired from FactSet.

• The cost of common equity was calculated using the Capital Asset Pricing Model (CAPM). In this model, the risk-free rate utilized was presumed to be the median yield as reported by FactSet for 10-year Government Treasuries. The beta used in the calculation depicted in Figure 2 was sourced from FactSet and Value Line since they were identical. Additionally, the Market Risk Premium (MRP) employed was the US median obtained from Fernandez et al.'s 2024 MRP Calculations.

• The three WACCs were computed using betas sourced from FactSet, Value line, and S&P Capital IQ. Figure 1 illustrates that the betas from FactSet and Value Line are identical, however, an average of all three betas was used to calculate the average WACC, believing that this approach would result in a more accurate evaluation of the company.

Link to excel file