Below is information provided for two companies, A and B. Assuming a risk-free rate of 2.5%, an effective tax rate of 40%, and a market risk premium of 5.5%, estimate the Weighted Average Cost of Capital (or WACC) for companies A & B.
Company A Company B
Beta 0.86 0.78
Credit rating AA A
Cost of debt
(before-tax) 6.885% 7.125%
Debt to total
Capital 34% 41%