El Paso Electric - WACC Analysis

El Paso Electric (Weighted Average Cost of Capital (WACC) Analysis)

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Helpful Information for El Paso Electric's Analysis

What is the WACC Formula? Analyst use the WACC Discount Rate (weighted average cost of capital) to determine El Paso Electric'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 El Paso Electric. Value Investing Importance? This method is widely used by investment professionals to determine the correct price for investments in El Paso Electric before they make value investing decisions. This WACC analysis is used in El Paso Electric's discounted cash flow (DCF) valuation and see how the WACC calculation affect's El Paso Electric's company valuation.

WACC Analysis Information

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

2. The WACC calculation uses the higher of El Paso Electric'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 El Paso Electric uses a significant proportion of equity capital.