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%