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Betawacc

This document estimates the weighted average cost of capital (WACC) for a project or acquisition using comparable company analysis. It calculates the unlevered beta and cost of equity for comparable firms, then uses the average unlevered beta to determine the project's levered beta and cost of equity. The document shows the calculation of the project's WACC using the costs of debt and equity weighted by the project's capital structure. The WACC is estimated to be 10.4%.

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Nabarun Bhattacharya
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30 views1 page

Betawacc

This document estimates the weighted average cost of capital (WACC) for a project or acquisition using comparable company analysis. It calculates the unlevered beta and cost of equity for comparable firms, then uses the average unlevered beta to determine the project's levered beta and cost of equity. The document shows the calculation of the project's WACC using the costs of debt and equity weighted by the project's capital structure. The WACC is estimated to be 10.4%.

Uploaded by

Nabarun Bhattacharya
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
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ESTIMATING THE WEIGHTED AVERAGE COST OF CAPITAL

Input cells are in yellow.

Comparable Companies

Firm 1 Firm 2 Firm 3 Average

DATA Amount of equity 200 200 300


Amount of debt 100 200 200
Tax rate 40% 35% 38%
Equity beta 1.10 1.25 0.90

RESULT 1+ (1-T)D/E 1.30 1.65 1.41


Unlevered equity beta 0.85 0.76 0.64 0.75

Project or Acquisition

DATA % Debt 40%


% Equity 60%
Tax rate 40%

RESULT 1+ (1-T)D/E 1.40


Unlevered project beta 0.75 = average of unlevered equity betas of comparable firms
Project equity beta 1.05

DATA Risk-free rate 6.00% = yield on long-term Treasury bonds


Market risk premium 7.40% = historical average excess return of S&P 500

RESULT Project equity beta 1.05


Market risk premium 7.40%
Equity risk premium 7.74%
Plus risk-free rate 6.00%
Cost of equity 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% 40.0% 2.2%


Cost of equity 13.7% 60.0% 8.2%
Weighted average cost of capital 10.4%

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