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GuruFocus has detected 3 Warning Signs with JPMorgan Chase & Co \$JPM.
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JPMorgan Chase & Co (NYSE:JPM)
WACC %
10.4% (As of Today)

As of today, JPMorgan Chase & Co's weighted average cost of capital is 10.4%. JPMorgan Chase & Co's return on invested capital is 20.50% (calculated using TTM income statement data). JPMorgan Chase & Co generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

Definition

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as the firm's cost of capital. Generally speaking, a company's assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.

 WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)

1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, JPMorgan Chase & Co's market capitalization (E) is \$309533.682 Mil.
The market value of debt is typically difficult to calculate, therefore, GuruFocus uses book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average Short-Term Debt and Long-Term Debt together. As of Dec. 2016, JPMorgan Chase & Co's latest two-year average Short-Term Debt was \$13650 Mil and its latest two-year average Long-Term Debt was \$21905 Mil. The total Book Value of Debt (D) is \$35555 Mil.
a) weight of equity = E / (E + D) = 309533.682 / (309533.682 + 35555) = 0.897
b) weight of debt = D / (E + D) = 35555 / (309533.682 + 35555) = 0.103

2. Cost of Equity:
GuruFocus uses Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)
a) GuruFocus uses 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is 2.30000000%. Please go to Economic Indicators page for more information.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. JPMorgan Chase & Co's beta is 1.15.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. GuruFocus requires market premium to be 6%.
Cost of Equity = 2.30000000% + 1.15 * 6% = 9.2%

3. Cost of Debt:
GuruFocus uses last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.
As of Dec. 2016, JPMorgan Chase & Co's interest expense (positive number) was \$9818 Mil. Its total Book Value of Debt (D) is \$35555 Mil.
Cost of Debt = 9818 / 35555 = 27.6136%.

4. Multiply by one minus Average Tax Rate:
GuruFocus uses the latest two-year average tax rate to do the calculation.
The latest Two-year Average Tax Rate is 24.385%.

JPMorgan Chase & Co's Weighted Average Cost Of Capital (WACC) for Today is calculated as:

 WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate) = 0.897 * 9.2% + 0.103 * 27.6136% * (1 - 24.385%) = 10.4%

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

Explanation

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

As of today, JPMorgan Chase & Co's weighted average cost of capital is 10.4%. JPMorgan Chase & Co's return on invested capital is 20.50% (calculated using TTM income statement data). JPMorgan Chase & Co generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

Be Aware

1. GuruFocus uses book value of debt (D) to do the calculation. It is simplified by adding latest two-year average Short-Term Debt and Long-Term Debt together.

2. The WACC formula discussed above does not include Preferred Stock. Please adjust if preferred stock is considered.

3. (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. GuruFocus requires market premium to be 6%.

4. GuruFocus uses last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.

Related Terms

Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

JPMorgan Chase & Co Annual Data

 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 Dec13 Dec14 Dec15 Dec16 WACC 12.91 6.67 5.01 5.31 5.61 5.62 4.69 4.07 4.97 6.41

JPMorgan Chase & Co Quarterly Data

 Dec14 Mar15 Jun15 Sep15 Dec15 Mar16 Jun16 Sep16 Dec16 Mar17 WACC 4.07 3.88 3.07 4.55 4.97 4.82 4.78 4.83 6.41 0.00
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