10-14-2014, 01:52 PM
Possible issues with the way that website calculates WACC:
1) It considers the average historical rate of return for the market to be 11%, which is probably over optimistic
2) It considers the current risk free rate to 3%, which is definitely over optimistic
Other notes: they seem to use the same beta as yahoo financial and they use the CAPM model to calculate cost of equity
Weighted Average Cost of Capital (WACC) = (cost of equity * %equity) + (cost of debt * %debt)(1-tax rate)
Using the CAPM model
cost of equity = risk free rate + Beta of stock *(expected return of the general market - risk free rate)
1) It considers the average historical rate of return for the market to be 11%, which is probably over optimistic
2) It considers the current risk free rate to 3%, which is definitely over optimistic
Other notes: they seem to use the same beta as yahoo financial and they use the CAPM model to calculate cost of equity
Weighted Average Cost of Capital (WACC) = (cost of equity * %equity) + (cost of debt * %debt)(1-tax rate)
Using the CAPM model
cost of equity = risk free rate + Beta of stock *(expected return of the general market - risk free rate)