The WACC of Ellington Residential Mortgage REIT (EARN) is 9.2%.
| Range | Selected | |
| Cost of equity | 5.50% - 7.10% | 6.30% |
| Tax rate | 26.20% - 27.00% | 26.60% |
| Cost of debt | 4.00% - 23.90% | 13.95% |
| WACC | 3.6% - 14.8% | 9.2% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 0.35 | 0.4 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 5.50% | 7.10% |
| Tax rate | 26.20% | 27.00% |
| Debt/Equity ratio | 2.9 | 2.9 |
| Cost of debt | 4.00% | 23.90% |
| After-tax WACC | 3.6% | 14.8% |
| Selected WACC | 9.2% | |
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 EARN:
cost_of_equity (6.30%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (0.35) + 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.