Reynolds American - WACC Analysis

Reynolds American (Weighted Average Cost of Capital (WACC) Analysis)



Helpful Information for Reynolds American's Analysis

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

WACC Analysis Information

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

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