Calculating the weighted average cost of capital for the telephone industry in Russia
Accounting and Finance
In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for bond ratings, bond risk premiums, and levered CAPM betas to compute the cost of equity and the weighted average cost of capital for Microsoft at different debt levels. This study shows the impact of increasing financial leverage on WACC. As financial leverage increases, the WACC decreases until the optimal debt ratio is reached, after which, the WACC begins to rise. At this debt ratio, the value of Microsoft will be maximized. Our results indicate the optimal debt ratio for Microsoft is 37.5 percent.
Gardner, J., McGowan, Jr., C., & Moeller, S. E. (2011). Calculating the weighted average cost of capital for the telephone industry in Russia. Journal of Case Research in Business and Economics, 3.