Determining WACC with stock with a low beta

CFA General
#1

Hi Everyone,

I am trying to make the transition into equity research and as such I am creating a research report.

I am using CAPM to calculate the cost of equity, however the stock I have chosen has a low beta of 0.5 which is therefore resulting in a low cost of equity and a low WACC which ultimately is giving me a target price which is 3X higher than where the stock is trading now.

Does anyone have any methods or suggestions to come up with a more reasonable estimate of the cost of equity?

Thanks,

#2

You could always add additional factors (size and value being the most obvious). Also you could calculate your own beta and see if you get a different result.

also do you feel your cash flows are about at a market level, if you are anticipating this company to be much faster growing or more profitable than everyone else 3x above the current stock price might make sense. In that case if you want to arrive at a more reasonable value maybe tone down your projections a bit.

#3

Use a bottom up beta.

What’s the country of operation, and industry? What risk free rates and equity risk premias are you using?