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    Estimating The Weighted Average Cost of Capital: Comparable Companies

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    Shubham Sharma
    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 combines the after-tax cost of debt and cost of equity weighted by the project's capital structure to estimate a WACC of 10.4%.

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    Estimating The Weighted Average Cost of Capital: Comparable Companies

    Uploaded by

    Shubham Sharma
    25 views1 page
    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 combines the after-tax cost of debt and cost of equity weighted by the project's capital structure to estimate a WACC of 10.4%.

    Original Title

    betawacc-1

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    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 combines the after-tax cost of debt and cost of equity weighted by the project's capital structure to estimate a WACC of 10.4%.

    Copyright:

    © All Rights Reserved
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    25 views1 page

    Estimating The Weighted Average Cost of Capital: Comparable Companies

    Uploaded by

    Shubham Sharma
    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 combines the after-tax cost of debt and cost of equity weighted by the project's capital structure to estimate a WACC of 10.4%.

    Copyright:

    © All Rights Reserved
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    of 1

    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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