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Estimating The Weighted Average Cost of Capital: Comparable Companies

This document estimates the weighted average cost of capital for a project or acquisition. It provides comparable company data to calculate average unlevered equity beta. It then uses the project's debt to equity ratio, tax rate, and the average unlevered beta to calculate the project's levered equity beta and cost of equity. The risk-free rate and market risk premium are used to calculate the equity risk premium and cost of equity. The costs of debt and equity are weighted based on the capital structure to determine the weighted average cost of capital of 10.4%.

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Md Rakibul Hasan
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23 views

Estimating The Weighted Average Cost of Capital: Comparable Companies

This document estimates the weighted average cost of capital for a project or acquisition. It provides comparable company data to calculate average unlevered equity beta. It then uses the project's debt to equity ratio, tax rate, and the average unlevered beta to calculate the project's levered equity beta and cost of equity. The risk-free rate and market risk premium are used to calculate the equity risk premium and cost of equity. The costs of debt and equity are weighted based on the capital structure to determine the weighted average cost of capital of 10.4%.

Uploaded by

Md Rakibul Hasan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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ESTIMATING THE WEIGHTED AVERAGE COST OF CAPITAL

Input cells are in yellow.


Comparable Companies
Firm 1

Firm 2

Firm 3

DATA

Amount of equity
Amount of debt
Tax rate
Equity beta

200
100
40%
1.10

200
200
35%
1.25

300
200
38%
0.90

RESULT

1+ (1-T)D/E
Unlevered equity beta

1.30
0.85

1.65
0.76

1.41
0.64

Average

0.75

Project or Acquisition
DATA

% Debt
% Equity
Tax rate

40%
60%
40%

RESULT

1+ (1-T)D/E
Unlevered project beta
Project equity beta

1.40
0.75
1.05

DATA

Risk-free rate
Market risk premium

RESULT

Project equity beta


Market risk premium
Equity risk premium
Plus risk-free rate
Cost of equity

= average of unlevered equity betas of comparable firms

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%

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

Cost of debt

9.0%

RESULT

Weighted
Weights
Cost
After-tax cost of debt
5.4%
Cost of equity
13.7%
Weighted average cost of capital

40.0%
60.0%

2.2%
8.2%
10.4%

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