Calculating a Company's Cost of Capital Prof. Ian H. Giddy, New York University |

1. Cost of debt is what it would cost the company, given its
rating, in today's market, adjusted for the tax deduction on interest.
Rd = Interest Rate(1-Tax Rate)
The Credit Spread is a function of the individual company's credit risk, and the market price of credit risk. 2. Re=Rf+Beta(Rm-Rf)
We start with the company's current (levered) beta, then obtain the unlevered beta, then see what the beta would be at different levels of leverage: The current unlevered beta is Betaunlev=Betalev/(1+(1-tax rate)(D/E)) =The Riskfree rate is a long-term government bond rate, such as the 10-year Treasury yield. The Market Return is the expected long term performance of a broad market portfolio, such as the S&P 500. 3. WACC = Rd(D/C ratio)+Re(E/C ratio) Debt/capital (D/C) ratio = total debt/(total debt +share price*shares
outstanding)
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