The WACC of Redwood Trust Inc (RWT) is 12.0%.
| Range | Selected | |
| Cost of equity | 5.40% - 9.00% | 7.20% |
| Tax rate | 8.70% - 16.90% | 12.80% |
| Cost of debt | 4.90% - 23.90% | 14.40% |
| WACC | 4.5% - 19.4% | 12.0% |
| Category | Low | High |
| Long-term bond rate | 3.9% | 4.4% |
| Equity market risk premium | 4.6% | 5.6% |
| Adjusted beta | 0.33 | 0.73 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 5.40% | 9.00% |
| Tax rate | 8.70% | 16.90% |
| Debt/Equity ratio | 21.9 | 21.9 |
| Cost of debt | 4.90% | 23.90% |
| After-tax WACC | 4.5% | 19.4% |
| Selected WACC | 12.0% | |
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 RWT:
cost_of_equity (7.20%) = risk_free_rate (4.15%) + equity_risk_premium (5.10%) * adjusted_beta (0.33) + 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.