The WACC of Arlington Asset Investment Corp (AAIC) is 5.6%.
| Range | Selected | |
| Cost of equity | 8.80% - 12.10% | 10.45% |
| Tax rate | 0.50% - 8.60% | 4.55% |
| Cost of debt | 5.00% - 5.00% | 5.00% |
| WACC | 5.6% - 5.7% | 5.6% |
| Category | Low | High |
| Long-term bond rate | 4.2% | 4.7% |
| Equity market risk premium | 5.0% | 6.0% |
| Adjusted beta | 0.93 | 1.16 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 8.80% | 12.10% |
| Tax rate | 0.50% | 8.60% |
| Debt/Equity ratio | 5.62 | 5.62 |
| Cost of debt | 5.00% | 5.00% |
| After-tax WACC | 5.6% | 5.7% |
| Selected WACC | 5.6% | |
The Cost of Equity reflects the return a company needs to deliver to shareholders to justify the risk of investing in its shares. It’s computed using the Capital Asset Pricing Model (CAPM), which blends the risk-free rate, the stock’s beta, and the market risk premium.
This method evaluates the stock’s risk compared to a safe investment and the market’s overall volatility.
Here’s how we figure out the cost of equity for AAIC:
cost_of_equity (10.45%) = risk_free_rate (4.45%) + equity_risk_premium (5.50%) * adjusted_beta (0.93) + risk_adjustments (0.25%)
We include the risk adjustments, which range from 0% to 1%, to keep our WACC conservatives, especially for companies traded in developing markets.