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%