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SFGSDF

This document estimates the weighted average cost of capital for a project or acquisition. It calculates the unlevered beta and levered beta for comparable companies to determine an average unlevered beta of 0.75. Using the project's debt to equity ratio and tax rate, it calculates a levered project beta of 1.05. It then determines the cost of equity is 13.74% based on the risk-free rate, market risk premium, and project equity beta. The after-tax cost of debt is estimated at 5.4%. Weighting the cost of equity and debt by their proportions, the weighted average cost of capital is estimated at 10.4%.

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Camille Caramanzana
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Download as XLS, PDF, TXT or read online on Scribd
109 views

SFGSDF

This document estimates the weighted average cost of capital for a project or acquisition. It calculates the unlevered beta and levered beta for comparable companies to determine an average unlevered beta of 0.75. Using the project's debt to equity ratio and tax rate, it calculates a levered project beta of 1.05. It then determines the cost of equity is 13.74% based on the risk-free rate, market risk premium, and project equity beta. The after-tax cost of debt is estimated at 5.4%. Weighting the cost of equity and debt by their proportions, the weighted average cost of capital is estimated at 10.4%.

Uploaded by

Camille Caramanzana
Copyright
© © All Rights Reserved
Available Formats
Download as XLS, 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
Weights
After-tax cost of debt
5.4%
Cost of equity
13.7%
Weighted average cost of capital

40.0%
60.0%

Weighted
Cost
2.2%
8.2%
10.4%

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