Cost of Equity - WACC Calculation
Hello fellow Monkeys, I need your expertise on the current cost of equity.
Since January 2018, we all have been experiencing the rise of interest rates in the US as well as the drop in the corporate tax rate. But one area that has not been discussed much is the rise in the cost of equity. The equity risk premium has to stay consistent overtime (and obviously can widen or contract depending on the business cycle) so if the Rf rate rises, the expected market return has to follow suit. I could also agree that the recent volatility and highly priced securities could increase the risk premium for investors to bear the risk of currently holding stocks.
I am in charge of calculating the WACC for my company, which we obviously also use as a threshold for use of capital. I currently use the expected market return from Bloomberg in my calculations which was approved by the auditors a long time before I joined the company. One of the flows of the data stream is that the expected market return seems to be adjusted by bloomberg on Jan 1st and the expect mkt return experienced a more than 100 basis point jump overnight this year on Jan 1st 2018. The way they calculate that measure is by weighting the implied IRR of the components of the S&P 500 by market cap. One could argue that the favorable tax rate boosted earnings and in order to keep the current valuation intact we would need a higher IRR to discount back the future dividends to today's value. However there seem to be the same adjustment on jan 1st every year even though this year it is much bigger than usual. I called Bloomberg and they were unable to provide a concrete answer (How can they not have an answer by the way...)
My question to all of you is the following, is there any other source that you guys use? I know there was a JPM report but it was discontinued a couple years ago. If not, do you have a better explanation than mine to explain the current cost of equity?
Thanks for your time, any feedback is appreciated.
6%
EDIT: or 5.5%
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