US Steel has $3.16 billion in total debt (which approximates is market value). Interest expense for the year was about $214.0 million. The company’s market capitalization is approximately $1.17 billion, its market beta is 2.65, and its assumed tax rate is 37%. Assume that the risk free rate equals 2.5% and the market premium equals 5%.
Estimate of US cost of debt capital: 4.3%
Estimate of US Steel’s cost of equity capital: 15.8%
Using these rounded answers (two estimates above), estimate US Steel’s weighted average cost of capital.