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