The WACC of Southwest Airlines Co (LUV) is 7.9%.
| Range | Selected | |
| Cost of equity | 8.30% - 10.50% | 9.40% |
| Tax rate | 26.10% - 26.40% | 26.25% |
| Cost of debt | 4.00% - 7.50% | 5.75% |
| WACC | 6.8% - 9.1% | 7.9% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 0.96 | 1 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 8.30% | 10.50% |
| Tax rate | 26.10% | 26.40% |
| Debt/Equity ratio | 0.39 | 0.39 |
| Cost of debt | 4.00% | 7.50% |
| After-tax WACC | 6.8% | 9.1% |
| Selected WACC | 7.9% | |
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 LUV:
cost_of_equity (9.40%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (0.96) + 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.