The WACC of Laredo Petroleum Inc (LPI) is 9.7%.
| Range | Selected | |
| Cost of equity | 11.00% - 16.20% | 13.60% |
| Tax rate | 0.80% - 1.20% | 1.00% |
| Cost of debt | 5.30% - 8.60% | 6.95% |
| WACC | 7.7% - 11.8% | 9.7% |
| Category | Low | High |
| Long-term bond rate | 4.2% | 4.7% |
| Equity market risk premium | 4.2% | 5.2% |
| Adjusted beta | 1.59 | 2.1 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 11.00% | 16.20% |
| Tax rate | 0.80% | 1.20% |
| Debt/Equity ratio | 1.38 | 1.38 |
| Cost of debt | 5.30% | 8.60% |
| After-tax WACC | 7.7% | 11.8% |
| Selected WACC | 9.7% | |
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 LPI:
cost_of_equity (13.60%) = risk_free_rate (4.45%) + equity_risk_premium (4.70%) * adjusted_beta (1.59) + 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.