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