Cost of Capital

The Cost of Capital

Canyon Drilling, Inc. has just come under new management. One of the first things the new management wants to accomplish is to identify its capital structure and the cost of additional funding, if needed.

According to the accounting department, the current balance sheet is accurate and reflects the financial structure of the company. They have also calculated the marginal tax rate to be 40%. The company’s beta is currently 1.15.

Your Chief Financial Officer, Marge, has also provided you the following information about the market and the company’s financials:

Required:

• Assuming the same capital structure is to be maintained, what is the optimal capital structure for Canyon Drilling?
• What is the component cost of capital for the firm?
• Calculate Canyon Drilling’s after tax weighted average cost of capital, using the information above.

Deliverables:

In an executive summary of 3 to 5 pages, submit your findings from the above-noted requirements in a Microsoft Word or Excel document. Use an MS Excel document to illustrate your calculations.