Ames National (Weighted Average Cost of Capital (WACC) Analysis)
Helpful Information for Ames National's Analysis
What is the WACC Formula? Analyst use the WACC Discount Rate (weighted average cost of capital) to determine Ames National'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 Ames National. Value Investing Importance? This method is widely used by investment professionals to determine the correct price for investments in Ames National before they make value investing decisions. This WACC analysis is used in Ames National's discounted cash flow (DCF) valuation and see how the WACC calculation affect's Ames National's company valuation.
WACC Analysis Information
1. The WACC (discount rate) calculation for Ames National uses comparable companies to produce a single WACC (discount rate). An industry average WACC (discount rate) is the most accurate for Ames National over the long term. If there are any short-term differences between the industry WACC and Ames National's WACC (discount rate), then Ames National is more likely to revert to the industry WACC (discount rate) over the long term.
2. The WACC calculation uses the higher of Ames National'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 Ames National uses a significant proportion of equity capital.