The WACC of Kansas City Southern (KSU) is 7.3%.
| Range | Selected | |
| Cost of equity | 6.70% - 9.30% | 8.00% |
| Tax rate | 29.90% - 31.40% | 30.65% |
| Cost of debt | 4.10% - 4.50% | 4.30% |
| WACC | 6.2% - 8.5% | 7.3% |
| Category | Low | High |
| Long-term bond rate | 3.2% | 3.7% |
| Equity market risk premium | 4.2% | 5.2% |
| Adjusted beta | 0.83 | 0.97 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 6.70% | 9.30% |
| Tax rate | 29.90% | 31.40% |
| Debt/Equity ratio | 0.14 | 0.14 |
| Cost of debt | 4.10% | 4.50% |
| After-tax WACC | 6.2% | 8.5% |
| Selected WACC | 7.3% | |
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 KSU:
cost_of_equity (8.00%) = risk_free_rate (3.45%) + equity_risk_premium (4.70%) * adjusted_beta (0.83) + 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.