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General Electric: Assessing The WACC, Cost Of Debt And Cost Of Equity

|Includes: General Electric Company (GE)

Understanding General Electric's (NYSE:GE) cost of debt, cost of equity and WACC is an important factor in stock research. Using these formulas an investor will understand how much the shareholder should expect in return for the stock over the long-term, how much the company pays for its debt and how much the company needs in return to break even on its investments.

Cost of Debt

The cost of debt is the effective rate that a company pays on its total debt.

As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing. This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.

8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.

9. Current tax rate

  • 2013 TTM - = (4.34)%

2013 TTM GE has averaged tax rate of (4.34)%

10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)

The cost of debt after tax is the effective rate that a company pays on its current debt after tax.

  • .04875 (1 - .0434) = Cost of debt after tax

The cost of debt after tax for Canadian National Railway is 5.09%

Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.