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Author: physdude One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 203579  
Subject: Re: The Non-essentiality of Growth Date: 2/16/2013 3:59 PM
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For future reference, WACC = d/(d+e)(Rd)(1-t) + e/(d+e)(Re)

Applying this to Apple, which has no debt, gives WACC = Re = Rf+b(ERPm) =
2% + 0.75*ERPm which is roughly 8% if you use the fairly commonly accepted
value of 8% p.a. for the equity risk premium and the beta of 0.75 that
yahoo gives. Aswath Damodaran uses a beta of 1.4 or so which could refer
to a beta estimated over a different time period than yahoo's estimate.
Anyway, it is probably better to use the more conservative estimate, but
it is important to remember that this is fundamentally a very approximate
formula.

In this regard, it is also good to keep in mind that Re = Rf + b(ERPm)
must be taken with a very large pinch of salt as the CAPM is known to be a
very poor model empirically. There is, surprisingly, no known good
formula as yet for this important quantity - the academic quasi-gold
standard is the Fama-French 3 factor model augmented with momentum.
But, however one looks at it, 12.5% looks like a generously conservative
value (he uses 9 and 9.5% in other parts of his blog) and more
optimistic investors could use values down to 7-8%. All in all, it would
seem like the $609 estimate is quite conservative.
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