The WACC of Regional Management Corp (RM) is 7.5%.
| Range | Selected | |
| Cost of equity | 15.70% - 24.10% | 19.90% |
| Tax rate | 22.60% - 23.40% | 23.00% |
| Cost of debt | 4.20% - 9.10% | 6.65% |
| WACC | 5.3% - 9.7% | 7.5% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 2.58 | 3.44 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 15.70% | 24.10% |
| Tax rate | 22.60% | 23.40% |
| Debt/Equity ratio | 5.32 | 5.32 |
| Cost of debt | 4.20% | 9.10% |
| After-tax WACC | 5.3% | 9.7% |
| Selected WACC | 7.5% | |
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 RM:
cost_of_equity (19.90%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (2.58) + 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.