Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier. McClure will be using this estimate, along with projected cash ?ows from Frontier’s new projects, to estimate the effect of these new projects on the value of Frontier. McClure has gathered the following information on Frontier Corporation:
Current Year Forecasted for Next Year
Book value of debt $50 $50Market value of debt $62 $63
Book value of shareholders’ equity $55 $58
Market value of shareholders’ equity $210 $220
The weights that McClure should apply in estimating Frontier’s cost of capital for debt and equity are, respectively:
wd=0.200; we=0.800.
wd=0.185; we=0.815.
wd=0.223; we=0.777.