You have been asked to estimate the cost of capital for Colonia Enterprises, consumer product company, and
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Question:
You have been asked to estimate the cost of capital for Colonia Enterprises, consumer product company, and have collected the following information on the company:
- The company has 80 million shares trading at $25/share. The book value of equity is $ 1 billion. Theunlevered betafor consumer product companies is 0.80.
- The company has ten-year, interest-bearing debt with a book value of $ 1 billion and interest expenses of $40 million, in the most recent year. It also has lease commitments of $100 million a year for the next five years. The company has a Baa2 rating from Moody's and the default spread for this rating is 3%.
- The risk free rate is 2% and the equity risk premium is 6%. The marginal tax rate is 40%.
Estimate the cost of capital for the firm.
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