Morningstar - WACC Analysis

Morningstar (Weighted Average Cost of Capital (WACC) Analysis)

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Helpful Information for Morningstar's Analysis

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

WACC Analysis Information

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

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