$4-8$ THRPEREO$-$CSETSESPFORESTIMATINGAFIRM'SWACC Compano Inc. was founded ni $1986$ ni Baytown, Texas. The firm provides oil$-$field services to the Texas Gulf Coast region, including hte 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\mathrm{.}334$ billion.

Liabilities and Owners' Capital Current liabilities

Accounts payable

Notes payable

Other current liabilities

Total c u r r e n t liabilities

Long$-$term debt $(8\mathrm{.}5\%$ interest paid semiannually, due in $2015)$

Total liabilities Owners' capital

Common stock $($$$1$ par value per share$)$ Paid$-$in$-$capital

Accumulated earnings

Total owners' capital

Total liabilities and owners' capital

Balance Sheet $($Book Values$)$

$ $8,250,000-$

$7,266,000$ $ $15,516,000$

$$420,000,000$ $$435,516,000$

Invested Capital $($Market Values$)$

$

$ $434,091,171$ $ $434,091,171$

$ $900,000,000$ $$1,334,091,171$

Compano's executive management team si concerned that its new investments be required ot meet an appropriate cost of capital hurdle before capital si commited 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 ot contact the firm's investment

banker to get input on current capital costs.

Jmi learned that, although the firm's current debt capital required an $8\mathrm{.}5\%$ coupon rate of interest $($with annual interest payments and no principal repayments until $2025),$ the current yield on similar debt would decline to $8\%$ fi the firm were to raise debt funds today. When he asked about the beta for Compano's debt, Jim was told that it was stan$-$

dard practice to assume a beta of$\mathrm{.}30$ 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 $\mathrm{.}90,$ what si Compano's levered equity beta? $($Hint: Compano plans on maintaining the mix of financing over time$).$

c$.$ assuming a long term us treasury bond yield of $5\mathrm{.}42\%$ 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?