How will Rensselaer Felt's WACC and cost of equity change if it issues $ 50 million in new equity and uses the proceeds to retire long- term debt? Assume the company's borrowing rates are unchanged. Use the three- step procedure .
Step 1 Calculate the opportunity cost of capital.
Step 2 Estimate the cost of debt, r D , at the new debt ratio, and calculate the new cost of equity.
Step 3 Recalculate the weighted- average cost of capital at the new financing weights.
The capital structure of the firm is as below:
Short-term debt $75,600
Long-term debt $208,600
Share holder equity (7.46 million*$46)=$343,160
This post shows how to calculate opportunity cost of equity, cost of capital.