Explain hwo the cost of capital is estimated and how to adjust for the effect of leverage on the cost of equity (unlevered Beta)?

chestnut Foods Estimation of WACC for Chestnut Foods (rear-end 2013) Chestnut Foods Hurdle Rate as of December 2013: 7.0% Chestnut uses a hurdle rate that reflects prevailing rates of returm in financial markets using a weighterd average of both debt and equity securities. The current mix of debt and equity in Chestaut's capital structure on a market-value basis is 20% debt and 80% equity. The prevailing yield on debt of similar credit risk is estimated at 3.5%. Based on a marginal corporate tax rate of 37%, the after-tax cost of debt is 2.2%. The cost of equity for Chestnut is estimated at 8.2% based on the CAPM with a beta of 0.9, a market risk prem mm of 6.0%, an d a risk-free rate of 2.8%. Based on these estimates, the WACC is 7.0%. d ebt and equity in Chestaur s .,An alternative model that uses a market tisk prensum of 9% and a tsk-free tate of a 1% gives sentlar cost-ofequity estimate. Exhibit 3 chestnut Foods Capital Market Data, December 2013 Yield 0.1% 30-Day Treaury Bill l0-Yeai Trea Boad 10-Year Corporate Bond: 2.8% 2.9% 3.2% 3.3% 3.5% 3.8% 4,1% 4.6% 5.8% 6.5% 6.5% 6.8% 8.4% 9.0% A+ Historical Market Rick Premium Equity Market Indes Less Government Deb 6.0 Data sounce Blocenberg, ease writer esimaees