Sheet1Input cells are in yellow.Comparable CompaniesFirm 1Firm 2Firm 3AverageDATAAmount of equity200200300Amount of debt100200200Tax rate40%35%38%Equity beta1.101.250.90

RESULT1+ (1-T)D/E1.301.651.41Unlevered equity beta0.850.760.640.75

Project or Acquisition

DATA% Debt40%% Equity60%Tax rate40%

RESULT1+ (1-T)D/E1.40Unlevered project beta0.75 = average of unlevered equity betas of comparable firmsProject equity beta1.05

DATARisk-free rate6.00% = yield on long-term Treasury bondsMarket risk premium7.40% = historical average excess return of S&P 500

RESULTProject equity beta1.05Market risk premium7.40%Equity risk premium7.74%Plus risk-free rate6.00%Cost of equity13.74%Note: The estimate of the market risk premium is the arithmetic average from 1927-1997, based onthe Ibbotson Associates "Stocks, Bonds, Bills and Inflation" data.DATACost of debt9.0%RESULTWeightedWeightsCostAfter-tax cost of debt5.4%40.0%2.2%Cost of equity13.7%60.0%8.2%Weighted average cost of capital10.4%

&14ESTIMATING THE WEIGHTED AVERAGE COST OF CAPITAL