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
