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Privatecompanywacc

This document provides a spreadsheet to calculate the weighted average cost of capital (WACC) for a private firm. It uses comparable publicly traded companies to estimate unlevered equity betas and cost of equity. It then applies the firm's debt to equity ratio and tax rate to calculate a levered equity beta and cost of equity. Finally, it weights the after-tax cost of debt and cost of equity by the firm's capital structure to arrive at a WACC of 14.3%.

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94 views

Privatecompanywacc

This document provides a spreadsheet to calculate the weighted average cost of capital (WACC) for a private firm. It uses comparable publicly traded companies to estimate unlevered equity betas and cost of equity. It then applies the firm's debt to equity ratio and tax rate to calculate a levered equity beta and cost of equity. Finally, it weights the after-tax cost of debt and cost of equity by the firm's capital structure to arrive at a WACC of 14.3%.

Uploaded by

kunaltiwari81
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

Cost of capital for a private firm - spreadsheet

Comparable Companies
Firm 1 Firm 2 Firm 3 Average

DATA Market value of equity 200 200 300 Input cells are in yellow.
Market (or book) value of debt 100 200 200
Tax rate 40% 35% 38%
Equity beta 1.45 1.90 1.70

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


Unlevered equity beta 1.12 1.15 1.20 1.16

Private Company

DATA % Debt 20%


% Equity 80% Estimate value of equity from P/E of comparables
Tax rate 40%

RESULT 1+ (1-T)D/E 1.15


Multiply unlevered project beta 1.16 = average of unlevered equity betas of comparable firms
Company equity beta 1.33

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


Market risk premium 7.50% = historical average excess return of S&P 500
over Treasury bonds from 1927-1998.

RESULT Company equity beta 1.33


Multiply by market risk premium 7.50%
Equity risk premium 9.98%
Plus risk-free rate 6.00%
Cost of equity 15.98%

Note: The estimate of the market risk premium is the arithmetic average from 1927-1998, based on
the Ibbotson Associates "Stocks, Bonds, Bills and Inflation" data.

DATA Cost of debt 13.0% from estimated rating from ebitda

RESULT Weighted
Weights Cost

After-tax cost of debt 7.8% 20.0% 1.6%


Cost of equity 16.0% 80.0% 12.8%
Weighted average cost of capital 14.3%

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