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 2014 describes a firm with $ 830,541,000 in book value assets that has a market value of $ 1.334 billion.

Compano€™s 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 firm€™s CFO has initiated a cost of capital study by one of his senior financial analysts, Jim Tipolli. Jim€™s first action was to contact the firm€™s investment banker to get input on current capital costs. Jim learned that, although the firm€™s current debt capital required an 8.5% coupon rate of interest (with annual interest payments and no principal repayments until 2025), the current yield on similar debt would decline to 8% if the firm were to raise debt funds today. When he asked about the beta for Compano€™s 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 Compano€™s capital structure weights for debt and equity that should be used to compute its cost of capital?
b. Based on Compano€™s corporate income tax rate of 40%, the firm€™s mix of debt and equity financing, and an unlevered beta estimate of .90, what is Compano€™s levered equity beta?
c. Assuming a long-term US Treasury bond yield of 5.42% and an estimated market risk premium of 5%, what should Jim€™s estimate of Compano€™s cost of equity be if he uses CAPM? d. What is your estimate of Compano€™s WACC?

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December 31, 2014 Balance Sheet Invested Capital (Market Values) Book Values) Liabilities and Owners Capital Current liabilities 8,250,000 Accounts payable Notes payable Other current liabilities 7266.000 $ 15.516,000 Total current liabilities Long-term debt (8.5% interest paid semiannually, due in 2015) $420,000,000 $435,516,000 434,091,171 434,091,171 Total liabilities Owners' capital Common stock ($1 par value per share) Paid-in-capital Accumulated earnings $ 40,000,000 100,025,000 255,000,000 $395,025,000 830,541,000 Total owners capital Total liabilities and owners capital $ 900,000,000 $1334.091,171