Southwest Airlines - WACC Analysis

Southwest Airlines (Weighted Average Cost of Capital (WACC) Analysis)

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Helpful Information for Southwest Airlines's Analysis

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

WACC Analysis Information

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

2. The WACC calculation uses the higher of Southwest Airlines'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 Southwest Airlines uses a significant proportion of equity capital.