First Financial Bancorp
NASDAQ:FFBC
Discount Rate
FFBC Cost of Equity
Discount Rate
FFBC's Cost of Equity, calculated using the formula
Risk-Free Rate + Beta x ERP,
stands at 7%.
The Beta, indicating the stock's volatility relative to the market, is 0.67, while the current Risk-Free Rate, based on government bond yields, is 4.24%, and the ERP, measuring the extra return over the risk-free rate required by investors, is 4.12%.
What is FFBC's discount rate?
FFBC
's current Cost of Equity is 7%.
In the valuation of banks and insurance companies, only the cost of equity is used due to their unique capital structures and regulatory environments.
These institutions heavily rely on debt, regulated more stringently than other industries, making the Weighted Average Cost of Capital (WACC) less applicable and accurate for them. The cost of equity offers a more direct measure of the risk and return expectations relevant to these specific sectors.
How is Cost of Equity for FFBC calculated?
The Cost of Equity represents the return a company must offer investors to compensate for the risk of investing in its stock. It's calculated using the Capital Asset Pricing Model (CAPM), which combines the risk-free rate, the stock's beta, and the equity risk premium (ERP).
This model considers the inherent risk of investing in the stock compared to a risk-free investment and the market's overall risk.
Here is how we calculate the cost of equity for
FFBC
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