The WACC of First American Financial Corp (FAF) is 7.1%.
| Range | Selected | |
| Cost of equity | 7.30% - 9.20% | 8.25% |
| Tax rate | 20.80% - 22.50% | 21.65% |
| Cost of debt | 5.00% - 5.00% | 5.00% |
| WACC | 6.4% - 7.8% | 7.1% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 0.74 | 0.77 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 7.30% | 9.20% |
| Tax rate | 20.80% | 22.50% |
| Debt/Equity ratio | 0.34 | 0.34 |
| Cost of debt | 5.00% | 5.00% |
| After-tax WACC | 6.4% | 7.8% |
| Selected WACC | 7.1% | |
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 FAF:
cost_of_equity (8.25%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (0.74) + 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.