The WACC of New Home Company Inc (NWHM) is 7.0%.
| Range | Selected | |
| Cost of equity | 9.70% - 14.80% | 12.25% |
| Tax rate | 35.40% - 37.80% | 36.60% |
| Cost of debt | 4.00% - 7.20% | 5.60% |
| WACC | 5.4% - 8.6% | 7.0% |
| Category | Low | High |
| Long-term bond rate | 3.2% | 3.7% |
| Equity market risk premium | 4.2% | 5.2% |
| Adjusted beta | 1.54 | 2.03 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 9.70% | 14.80% |
| Tax rate | 35.40% | 37.80% |
| Debt/Equity ratio | 1.5 | 1.5 |
| Cost of debt | 4.00% | 7.20% |
| After-tax WACC | 5.4% | 8.6% |
| Selected WACC | 7.0% | |
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 NWHM:
cost_of_equity (12.25%) = risk_free_rate (3.45%) + equity_risk_premium (4.70%) * adjusted_beta (1.54) + 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.