Benchmark a company's cost of capital and capital structure against those of its peers

Compare a company's capital structure and cost of capital with peers to judge whether differences are justified. With weights from market values or a target structure, the weighted average cost of capital is WACC = weight of equity × cost of equity + weight of debt × cost of debt × (1 − t); a debt-to-equity ratio of 0.30 means a debt weight of 0.30 ÷ 1.30, about 23%. Differences can come from leverage, business risk, size, liquidity or specific risks. More debt adds cheap after-tax financing but raises the costs of equity and debt, so copying peer leverage rarely removes gaps driven by risk premiums. The traps are using the debt-to-equity ratio as a weight and forgetting the tax shield.