WACC (weighted average cost of capital) is among the collection of new fundamental analytics on which I’m working, as is EVA and other items that use WACC.
As you know, this is not an easy item to implement on p123 or any such platform since it was created based on the assumption that it would be calculated one company at a time based on each company’s circumstances.
Cost of debt would sometimes need to be approximated and cost of preferred would always need to be approximated based on the nature of what company’s report and what gets picked up in databases, but those are reasonably manageable.
Cost of equity is the main challenge. The simple answer is to use capital asset pricing model. We have a risk-free rate, but would necessarily have to make an assumption about equity risk premium since we could not reliably use any specific historical sample (that would often produce absurd results, especially when the number would be negative, which can be the case after the fact but can never be used as a before-the-fact assumption).
Beta is a big problem since it too is necessarily based on a specific time sample and for individual companies will often produce absurd results; i.e. penny stocks that are clearly carry massive business risk and frightening levels of volatility could show up with very low or even negative betas based on how the chips happened to have fallen for the stock and the index during a particular sample period. Having done some prototype, it’s clear to me that we cannot simply use across the board any beta we might get out of the standard function (try creating a custom formula for cost of equity; you’ll quickly see that). Using earnings yield as the basis for a cost of equity assumption is likewise troublesome because of the way data lines up across a large number of companies in a real-world context.
Right now, I’m inclined to work with a CAPM-based approach, but would need to create over-ride logic to adjust unusable numbers where they occur.
I welcome any thoughts from the p123 community on this topic.