Scribd
Upload
31 views1 page

Estimating The Weighted Average Cost of Capital: Comparable Companies

This document outlines the steps to estimate the weighted average cost of capital (WACC) for a project or acquisition. It provides sample data for three comparable firms to calculate their unlevered beta and equity beta. It then uses the average unlevered beta along with the project's debt-to-equity ratio to find the project's equity beta and cost of equity. The risk-free rate, market risk premium and project equity beta are combined to find the equity risk premium and cost of equity. The after-tax cost of debt and cost of equity are weighted based on the capital structure to calculate the WACC.

Uploaded by

Abhinav Sharma
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
31 views1 page

Estimating The Weighted Average Cost of Capital: Comparable Companies

This document outlines the steps to estimate the weighted average cost of capital (WACC) for a project or acquisition. It provides sample data for three comparable firms to calculate their unlevered beta and equity beta. It then uses the average unlevered beta along with the project's debt-to-equity ratio to find the project's equity beta and cost of equity. The risk-free rate, market risk premium and project equity beta are combined to find the equity risk premium and cost of equity. The after-tax cost of debt and cost of equity are weighted based on the capital structure to calculate the WACC.

Uploaded by

Abhinav Sharma
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
You are on page 1/ 1

ESTIMATING THE WEIGHTED AVERAGE COST OF CAPITAL

Input cells are in yellow. Comparable Companies Firm 1 DATA Amount of equity Amount of debt Tax rate Equity beta 1+ (1-T)D/E Unlevered equity beta 200 100 40% 1.10 1.30 0.85 Firm 2 200 200 35% 1.25 1.65 0.76 Firm 3 300 200 38% 0.90 1.41 0.64 Average

RESULT

0.75

Project or Acquisition DATA % Debt % Equity Tax rate 1+ (1-T)D/E Unlevered project beta Project equity beta Risk-free rate Market risk premium Project equity beta Market risk premium Equity risk premium Plus risk-free rate Cost of equity 40% 60% 40% 1.40 0.75 1.05

RESULT

= average of unlevered equity betas of comparable firms

DATA

6.00% = yield on long-term Treasury bonds 7.40% = historical average excess return of S&P 500 1.05 7.40% 7.74% 6.00% 13.74%

RESULT

Note: The estimate of the market risk premium is the arithmetic average from 1927-1997, based on the Ibbotson Associates "Stocks, Bonds, Bills and Inflation" data. DATA RESULT Weights After-tax cost of debt 5.4% Cost of equity 13.7% Weighted average cost of capital 40.0% 60.0% Cost of debt 9.0% Weighted Cost 2.2% 8.2% 10.4%

You might also like