Reading: WACC for Listed Firms
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So far, we have seen what the WACC is and how we use it in firm valuation. This section takes a brief look at how to estimate the WACC in practice.
2. Estimating the Cost of Equity
2.5. Putting Everything Together
Now we are ready to estimate Holcim's cost of equity. The preceding steps have provided us with the following estimates:
|
Variable |
Description |
Estimate |
|
\( R_F \) |
the risk-free rate of return |
2.01% |
|
MRP |
the market risk premium |
6.40% |
|
\( \beta_j \) |
the stock's beta |
1.05 |
Based on these estimates, Holcim's cost of equity according to the CAPM is 8.73%:
\( k_{E, Holcim} = R_F + MRP \times \beta_{Holcim} \) = 0.0201 + 0.0640×1.05 = 0.0873 = 8.73%.