The WACC of First State Financial Corp (FSTF) is 3.5%.
| Range | Selected | |
| Cost of equity | 18.80% - 48.40% | 33.60% |
| Tax rate | 36.70% - 37.30% | 37.00% |
| Cost of debt | 5.00% - 5.00% | 5.00% |
| WACC | 3.3% - 3.7% | 3.5% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 3.24 | 7.78 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 18.80% | 48.40% |
| Tax rate | 36.70% | 37.30% |
| Debt/Equity ratio | 84.46 | 84.46 |
| Cost of debt | 5.00% | 5.00% |
| After-tax WACC | 3.3% | 3.7% |
| Selected WACC | 3.5% | |
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 FSTF:
cost_of_equity (33.60%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (3.24) + 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.