Guided Walkthroughs
Full DCF — Step 6 of 12: Build SteadyCo's cost of equity. Inputs: risk-free rate 4.0%, equity risk premium 5.0%, levered beta 1.4.
Model answer
CAPM: Cost of equity = risk-free rate + levered beta × equity risk premium = 4.0% + 1.4 × 5.0% = 4.0% + 7.0% = 11.0%. Interpretation: equity holders demand the risk-free return plus compensation for…
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More from Guided Walkthroughs
- Full DCF — Step 1 of 12: Set up the model. SteadyCo has $100M of revenue in Year 0. What operating assumptions do you need before you can project unlevered free cash flow, and what are ours?
- Full DCF — Step 2 of 12: Project SteadyCo's revenue and EBITDA for Years 1–5.
- Full DCF — Step 3 of 12: From EBITDA, get to EBIT and NOPAT for each year. Why does a DCF tax EBIT rather than pre-tax income?
- Full DCF — Step 4 of 12: State the unlevered FCF formula and compute Year 1 unlevered FCF for SteadyCo.
- Full DCF — Step 5 of 12: Complete the 5-year unlevered FCF projection.
- Full DCF — Step 7 of 12: Now build the WACC. Additional inputs: pre-tax cost of debt 8.0%, tax rate 25%, target capital structure 80% equity / 20% debt.