The WACC of Advance Auto Parts Inc (AAP) is 4.8%.
| Range | Selected | |
| Cost of equity | 5.40% - 7.20% | 6.30% |
| Tax rate | 23.60% - 28.70% | 26.15% |
| Cost of debt | 4.60% - 5.10% | 4.85% |
| WACC | 4.3% - 5.2% | 4.8% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 0.33 | 0.42 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 5.40% | 7.20% |
| Tax rate | 23.60% | 28.70% |
| Debt/Equity ratio | 1.24 | 1.24 |
| Cost of debt | 4.60% | 5.10% |
| After-tax WACC | 4.3% | 5.2% |
| Selected WACC | 4.8% | |
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 AAP:
cost_of_equity (6.30%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (0.33) + 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.