The WACC of State Auto Financial Corp (STFC) is 6.7%.
| Range | Selected | |
| Cost of equity | 5.50% - 8.20% | 6.85% |
| Tax rate | 9.20% - 13.00% | 11.10% |
| Cost of debt | 5.00% - 5.00% | 5.00% |
| WACC | 5.4% - 8.0% | 6.7% |
| Category | Low | High |
| Long-term bond rate | 3.2% | 3.7% |
| Equity market risk premium | 4.2% | 5.2% |
| Adjusted beta | 0.54 | 0.76 |
| Additional risk adjustments | 0.0% | 0.5% |
| Cost of equity | 5.50% | 8.20% |
| Tax rate | 9.20% | 13.00% |
| Debt/Equity ratio | 0.05 | 0.05 |
| Cost of debt | 5.00% | 5.00% |
| After-tax WACC | 5.4% | 8.0% |
| Selected WACC | 6.7% | |
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 STFC:
cost_of_equity (6.85%) = risk_free_rate (3.45%) + equity_risk_premium (4.70%) * adjusted_beta (0.54) + 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.