FIN - Compano inc. (4-4 THREE-STEP PROCESS FOR ESTIMATING A FIRMS WACC)
Question # 00035367
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Updated on: 12/09/2014 12:05 AM Due on: 12/09/2014
4-4 THREE-STEP PROCESS FOR ESTIMATING A FIRMS WACC,
Compano inc. was founded in 1986 in Baytown, Texas. The firm provides
oil-field services to the Texas Gulf Coast region, including the leasing of
drilling barges. Its balance sheet for year-end 2006 describes a firm with
830,541,000 in assets (book values) and invested capital of more than 1.334
billion (based on market values).
December 31, 2006
Liabilities and owners capital
Balance sheet
Invested Capital
(Book value)
(Market values)
Current Liabilities
Accounts Payable
8,250,000
Notes payable
0
Other current liabilities
7,266,000
Total current liabilities
0
15,516,000
Long term debt (8.5% interest paid
Semiannually, due in 2015)
420,000,000 434,091,171
Total liabilities
435,516,000 434,091,171
Owners capital
Common stock ($1 par value per share) 40,000,000
Paid in capital
100,025,000
Accumulated earnings
255,000,000
Total owners capital
395,025,000
Total liabilities and owners capital 830,541,000 1,334,091,171
Companos executive management team is concerned that its new
investments be required to meet an appropriate cost of capital hurdle before
capital is committed. Consequently, the firms CFO has initiated a cost of
capital study by one of his senior financial analysts, Jim Tipolli. Jims first
action was to contact the firms investment banker to get input on current
capital costs.
Jim learned that although the firms current debt capital required an 8.5%
coupon rate of interest (with annual interest payments and no principal
repayments until 2015), the current yield on similar debt had declined to 8%
if the firm were to raise debt funds today. When he asked about the beta for
companos debt, Jim was told that it was standard practice to assume a beta
of .30 for the corporate debt of firms such as Compano.
A. What are Companos total invested capital and capital structure
weights for debt and equity?
B. Based on Companos corporate income tax rate of 40%, the firms
current capital structure, and an unlevered beta estimate of .90. What
is Companos levered equity beta?
C. Assuming a long term U.S. Treasury bond yield of 5.42% and an
estimated market risk premium of 5%, what should Jims estimate of
Companos cost of equity be if he uses the CAPM?
D. What is your estimate of Companys WACC?
Compano inc. was founded in 1986 in Baytown, Texas. The firm provides
oil-field services to the Texas Gulf Coast region, including the leasing of
drilling barges. Its balance sheet for year-end 2006 describes a firm with
830,541,000 in assets (book values) and invested capital of more than 1.334
billion (based on market values).
December 31, 2006
Liabilities and owners capital
Balance sheet
Invested Capital
(Book value)
(Market values)
Current Liabilities
Accounts Payable
8,250,000
Notes payable
0
Other current liabilities
7,266,000
Total current liabilities
0
15,516,000
Long term debt (8.5% interest paid
Semiannually, due in 2015)
420,000,000 434,091,171
Total liabilities
435,516,000 434,091,171
Owners capital
Common stock ($1 par value per share) 40,000,000
Paid in capital
100,025,000
Accumulated earnings
255,000,000
Total owners capital
395,025,000
Total liabilities and owners capital 830,541,000 1,334,091,171
Companos executive management team is concerned that its new
investments be required to meet an appropriate cost of capital hurdle before
capital is committed. Consequently, the firms CFO has initiated a cost of
capital study by one of his senior financial analysts, Jim Tipolli. Jims first
action was to contact the firms investment banker to get input on current
capital costs.
Jim learned that although the firms current debt capital required an 8.5%
coupon rate of interest (with annual interest payments and no principal
repayments until 2015), the current yield on similar debt had declined to 8%
if the firm were to raise debt funds today. When he asked about the beta for
companos debt, Jim was told that it was standard practice to assume a beta
of .30 for the corporate debt of firms such as Compano.
A. What are Companos total invested capital and capital structure
weights for debt and equity?
B. Based on Companos corporate income tax rate of 40%, the firms
current capital structure, and an unlevered beta estimate of .90. What
is Companos levered equity beta?
C. Assuming a long term U.S. Treasury bond yield of 5.42% and an
estimated market risk premium of 5%, what should Jims estimate of
Companos cost of equity be if he uses the CAPM?
D. What is your estimate of Companys WACC?
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Rating:
/5
Solution: FIN - Compano inc. (4-4 THREE-STEP PROCESS FOR ESTIMATING A FIRMS WACC)