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Correction to the last sentence..... Then the ERP feeds into the...

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vic_wattle

3,511 Posts.

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21/04/22

18:39

Post #: 60955522
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Originally posted by vic_wattle ↑

"So does everyone feel comfortable that the WACC assumption at 5.6% is reasonable???"

I find this really interesting.

The research report in question has the price dated 8 Apr. On that date the yield on the US 10 year bond and AUS 10 year bond were approximately 2.7% and 3% respectively. Yet the report uses a risk free rate (RFR) of 1.8%. Presumably the analyst thinks the RFR will average 1.8% over the timeframe of the DCF model.

The report uses an equity risk premium (ERP) of 5%. It is interesting if we break this down further into its components.

ERP = Ra - Rf = Ba(Rm - Rf)

where
Ra - expected return on investment in the asset. In this case "a" being a parcel of CSL shares.
Rf - expected return on the RFR. In this case the report is assuming an average of 1.8%.
Ba - Beta of a.
Rm - expected return of the market

We can use this to figure out what the analyst determined Rm to be.
Rm = 7.35

Then if we use todays current RFR (yield on US 10 year bond) of 2.86%, the ERP reduces to ~4%

Then the ERP feeds into the WACC, reducing the weighted value of equity linked capital.

.....

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Correction to the last sentence.....

Then the ERP feeds into the WACC, increasing it and thereby reducing the NPV of the business.

CSL Price at posting: $266.98 Sentiment: None Disclosure: Held
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(20min delay)
Last $287.32		Change 2.030(0.71%)		Mkt cap ! $139.1B

Open	High	Low	Value	Volume
$285.40	$287.70	$285.01	$146.1M	509.3K

Buyers (Bids)

No.	Vol.	Price($)
1	913	$287.28

Sellers (Offers)

Price($)	Vol.	No.
$287.43	227	1

View Market Depth

No.	Vol.	Price($)
1	913	287.280
1	775	287.220
1	5	287.200
1	784	287.160
1	776	287.100

Price($)	Vol.	No.
287.500	100	1
287.620	979	2
287.750	100	1
287.790	50	1
287.800	979	1

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