Pigeon River Brown Ale
Cost of Capital
Proportions of Long-term Debt and Equity Financing
Current market price of stock=$2.40Per share
Shares of common stock outstanding (thousands)=6,326From Actual worksheet’s financial statements, in thousands
Current market value of equity=$15,182Price per share multiplied by shares outstanding
Book value of long-term debt=$ 6,544From 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=0.70Given
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
