Solved by verified expert :Pigeon
River Brown Ale
Cost of
Capital
Proportions
of Long-term Debt and Equity Financing
Current
market price of stock=
$2.40
Per share
Shares
of common stock outstanding (thousands)=
6,326
From Actual worksheet’s
financial statements, in thousands
Current
market value of equity=
$15,182
Price per share
multiplied by shares outstanding
Book
value of long-term debt=
$ 6,544
From Actual worksheet’s
financial statements tab
Current
ratio of book value of debt to sum of book value of debt and market value of
equity=
30.1%
Calculated from above
info
Target
ratio of book value of debt to sum of book value of debt and market value of
equity=
30.1%
Judgment, based on
historical ratios in Hist Analys sheet
and market conditions.
Target
ratio of market value of equity to sum of book value of debt and market value
of equity=
69.9%
= 1 – debt ratio
Estimate Cost of Equity
Beta=
0.70
Given
Risk-free
rate=
4.0%
Given
Market
risk premium =
6.0%
Given
Cost of
equity=
8.2%
Calculated from above
info
Cost of
Debt
Interest
rate on debt=
8.0%
From Inputs worksheet
Tax
rate=
30.0%
From Inputs worksheet
After-tax cost of long-term
debt=
5.6%
Calculated from above
info
Calculation of WACC
WACC=
7.44%
Calculated
