This week your team will need the weighted average cost of capital to use for each project. For projects in the existing line of business, the appropriate cost of capital is the firms cost of capital (or in Chipotles case an 8% cost of capital is warranted). For projects outside the normal course of business, the cost of capital must be adjusted up or down from the corporate rate to compensate for the increased risk or the decreased risk brought to the corporation by the acceptance of this project. The write up should read some as follows: For the ____________________ project, we believe this project will have more risk, have less risk, or will equal risk (pick one) with Chipotles existing business. For the following reasons If the project is outside the normal operations of the firm, such as entering a new line of business, franchising, urban farming, international expansion, adding bars, then look up the betas for firms in that business and their debt to total assets percentages. For menu expansion projects, your job is done because these projects would have equivalent risk to the existing operations of Chipotle. So, you do not need to go any further. Some groups may go outside Chipotles normal business and enter industries with different risk profiles. For these groups you will need to do the following: For franchising, I would suggest using YUM, Wendys, and Mcdonald's to look up their betas on Yahoo Finance and average these betas. For farming, I would suggest using the betas of Fresh Del Monte (FDP), Archer Daniels Midland (ADM), and Bunge (BG) For international expansion I would suggest using YUM Brands of China (YUMC) and Arco Dorados Holdings (ARCO) as a proxy company in international restaurants. You will need to use Yahoo finance to find their beta and then average these. For adding bars, I would average the betas for Dave and Busters (PLAY), BJ Restaurants (BJRI), and Chuys (CHUY). Your group will need to get or calculate the average Betas for the firms, the average debt levels (in dollars), and average market capitalizations for these proxy companies (more about how to do this later in these instructions). After you have collected these data, you can use the following assumptions in calculating the projects weighted average cost of capital: Debt will have an after-tax cost of 4%. When using the capital asset pricing model to calculate the cost of equity capital using these assumptions: The risk-free rate of return is 3.5% The Beta is whatever you averaged from the proxy companies. The market risk premium is 5% To get your weightings of debt and equity: Look up the debt levels for each company using balance sheets (be careful to have the correct number of zeros many are in thousands). Take the stock price times the total share outstanding to get the companys market capitalization or value of equity or read it from Yahoo Finance. Add the two and divide by the total to get the weightings. Complete the calculation of this project or divisional cost of capital as illustrated in the lecture notes. Take the 4% cost of debt times the weighting for debt Take the cost of equity capital (as calculated by the capital asset pricing model) times the weighting for equity Add the two to get the weighted average cost of capital