American Electric Power - WACC Analysis

American Electric Power (Weighted Average Cost of Capital (WACC) Analysis)

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Helpful Information for American Electric Power's Analysis

What is the WACC Formula? Analyst use the WACC Discount Rate (weighted average cost of capital) to determine American Electric Power's investment risk. WACC Formula = Cost of Equity (CAPM) * Common Equity + (Cost of Debt) * Total Debt. The result of this calculation is an essential input for the discounted cash flow (DCF) analysis for American Electric Power. Value Investing Importance? This method is widely used by investment professionals to determine the correct price for investments in American Electric Power before they make value investing decisions. This WACC analysis is used in American Electric Power's discounted cash flow (DCF) valuation and see how the WACC calculation affect's American Electric Power's company valuation.

WACC Analysis Information

1. The WACC (discount rate) calculation for American Electric Power uses comparable companies to produce a single WACC (discount rate). An industry average WACC (discount rate) is the most accurate for American Electric Power over the long term. If there are any short-term differences between the industry WACC and American Electric Power's WACC (discount rate), then American Electric Power is more likely to revert to the industry WACC (discount rate) over the long term.

2. The WACC calculation uses the higher of American Electric Power's WACC or the risk free rate, because no investment can have a cost of capital that is better than risk free. This situation may occur if the beta is negative and American Electric Power uses a significant proportion of equity capital.