The information provided here illustrates how the Capital Asset Pricing Model (CAPM)-calculated beta values affect the Weighted Average Cost of Capital (WACC) for three different companies: Fact Set, Value Line, and S&P Capital. The risk of a stock in respect to the market as a whole is measured by its beta. A higher beta denotes a higher level of risk and, in accordance with the Capital Asset Pricing Model, should yield a higher projected rate of return to offset that risk. The weighted average cost of debt and equity capital for a business is represented by the WACC, a crucial financial indicator that is used to assess how much it costs to finance its operations.

In this dataset, Value Line has the greatest beta (0.75) and the lowest WACC (3.64%), indicating that it has a greater expected rate of return to compensate for its higher risk. Fact Set and S&P Capital, on the other hand, have smaller betas (0.37 and 0.38, respectively) and higher WACC values (6.60% and 7.50%, respectively), indicating that they have lower expected returns compared to their risk. The average WACC across these three firms is 5.91%, which is determined by the combination of their various betas and shows the cost of capital for an average-risk investment. This data demonstrates the vital relationship between beta, projected returns, and the cost of capital, which is essential for financial analysis and investment decision-making.

Key Assumptions

Listed bellow are the key assumptions made in calculating Merck & Co WACC of 5.91%

• The calculation of debt weight for WACC only includes interest-bearing debt that is categorized as nonoperational.

• The calculation of equity weight is based on the market value of equity, determined by multiplying the market price of the company's shares as of the calculation date by the number of shares outstanding on the filing date. This approach is chosen because the filing date is considered more relevant to the calculation date compared to the balance sheet date.

• The cost of equity for Merck and Co. was determined through the application of the Capital Asset Pricing Model (CAPM). In this approach, the cost of equity, which represents the required rate of return for the company, is calculated by adding the risk-free rate to the product of the market risk premium and the company's beta.

• Beta values for Merck and Co. were estimated using data from various sources, including Value Line, FactSet, and S&P Capital IQ. These beta values were then utilized in the Capital Asset Pricing Model (CAPM) to calculate the required rate of return. Subsequently, the Weighted Average Cost of Capital (WACC) for Merck and Co. was determined based on these calculations.

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