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in 1995 and 15.75 percent in 1996.17 Hakala then estimated the
cost of debt, which he based on “the prevailing prime lending
rate plus 1.0%.” For 1995 and 1996, the costs of debt were 9.50
percent and 9.25 percent, respectively.
Next, Hakala applied the values determined in the preceding
two steps to calculating the weighted average cost of capital,
sometimes hereinafter referred to as WACC. Hakala determined
that the WACC was 14.16 percent for 1995 and 14.76 percent for
1996.
In his expert witness report, Hakala described this process
as “using weights reflecting the relative importance of debt and
equity in the typical firm’s capital structure.” He multiplied
the cost of equity capital by a fraction derived from the
relative portion of total capital that consisted of equity; he
17 Hakala’s report shows the arithmetic as follows:
1995: “15.06% = 5.96% plus (7.40% times 1.09) plus 1.00%”
1996: “15.75% = 6.65% plus (7.40% times 1.09) plus 1.00%”
Sledge’s supplemental report adds the same components for
1995 as follows:
Long-Term Risk Less [sic] Rate 5.96
+ Market Risk x Beta 7.4 x 1.09 = 8.07
+ Non-systematic risk 1.00
= Required return on equity 15.06 rounded
Sledge then uses the 15.06 percent in his calculations.
When we perform the indicated arithmetic, we get 15.026,
rounded to 15.03 percent for 1995, and 15.716, rounded to 15.72
percent for 1996.
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