LUV WACC - Weighted Average Cost of Capital

The WACC of Southwest Airlines Co (LUV) is 8.0%.

The Cost of Equity of Southwest Airlines Co (LUV) is 8.85%.

The Cost of Debt of Southwest Airlines Co (LUV) is 4.80%.

	Range	Selected
Cost of equity	7.40% - 10.30%	8.85%
Tax rate	24.50% - 26.10%	25.30%
Cost of debt	4.00% - 5.60%	4.80%
WACC	6.7% - 9.3%	8.0%

WACC

LUV WACC calculation

Category	Low	High

Long-term bond rate	3.9%	4.4%
Equity market risk premium	4.6%	5.6%
Adjusted beta	0.78	0.97

Additional risk adjustments	0.0%	0.5%
Cost of equity	7.40%	10.30%

Tax rate	24.50%	26.10%
Debt/Equity ratio	0.2	0.2
Cost of debt	4.00%	5.60%

After-tax WACC	6.7%	9.3%


Selected WACC	8.0%

LUV's CAPM model and how its cost of Equity is calculated

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 (8.85%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (0.78) + 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.