The WACC of Australian Ethical Investment Ltd (AEF.AX) is 9.4%.
| Range | Selected | |
| Cost of equity | 7.90% - 11.00% | 9.45% |
| Tax rate | 29.90% - 32.30% | 31.10% |
| Cost of debt | 5.00% - 5.00% | 5.00% |
| WACC | 7.9% - 11.0% | 9.4% |
| Category | Low | High |
| Long-term bond rate | 4.0% | 4.5% |
| Equity market risk premium | 5.1% | 6.1% |
| Adjusted beta | 0.75 | 0.98 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 7.90% | 11.00% |
| Tax rate | 29.90% | 32.30% |
| Debt/Equity ratio | 0 | 0 |
| Cost of debt | 5.00% | 5.00% |
| After-tax WACC | 7.9% | 11.0% |
| Selected WACC | 9.4% | |
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 AEF.AX:
cost_of_equity (9.45%) = risk_free_rate (4.25%) + equity_risk_premium (5.60%) * adjusted_beta (0.75) + 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.