Van Leer Products, Inc.
Cost of Capital Calculation
Proportions of Long-term Debt and Equity Financing
ValueSource
Current market price of stock=$40.12Given, per share
Shares of common stock outstanding (millions)=10Given, in millions
Current market value of equity=$401.20Price per share multiplied by shares outstanding
Book value of long-term debt=$99From financial statements in Actual worksheet
Current ratio of book value of debt to sum of book value of debt and market value of equity=19.8%Calculated from above info
Target ratio of book value of debt to sum of book value of debt and market value of equity=19.8%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=80.2%= 1 – debt ratio
Estimate Cost of Equity
Beta=1.40Given
Risk-free rate=6.0%Given
Market risk premium =5.0%Given
Cost of equity=13.0%Calculated from above info
Cost of Debt
Interest rate on debt=0.0%From Inputs Worksheet
Tax rate=0.0%From Inputs Worksheet
After-tax cost of long-term debt=0.0%Calculated from above info
Calculation of WACC
WACC=10.43%Calculated from above info