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.
December 31, 2014
Balance Sheet (Book Values)
Invested Capital (Market Values)
Liabilities and Owner\'s Capital
Current liabilities:
Accounts Payable
$8,250,000
Notes Payable
-
-
Other current liabilities
$7,266,000
Total current liabilities
$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
Owner\'s capital:
Common stock ($1 par value per share
$40,000,000
Paid-in-capital
$100,025,000
Accumulated earnings
$255,000,000
Total owner\'s capital
$395,025,000
$900,000,000
Total liabilities and owner\'s capital
$830,541,000
$1,334,091,171
Capital Market Data
Treasury Bond Yield
5.42%
Market Risk Premium
5.00%
Unlevered equity beta
0.90
Stock price
22.50
Market capitalization
Yield on debt
8.00%
Bond beta
0.30
Short-term interest bearing debt
New long-term debt total
-
Tax Rate
40.00%
Question 1. Fill in the boxes for market capitalization and short-term interest bearing debt
located under the capital market data.
Step 1: Evaluation the capital structure weights
Enterprise Value = Market Capitalization + Debt
Debt/Enterprise Value
Equity/Enterprise Value
Step 2: Estimate the costs of Financing
Debt (after taxes)
Debt/Equity Ratio
Equity
Levered equity beta
Step 3: Calculate the WACC
WACC
Question 2. Fill in the boxes for steps 1 through 3.
Capital Structure Weight
Source of Capital
(Proportion)
After-Tax Cost
Weighted After-Tax Cost
Debt
Equity
WACC
Question 3. Fill in the boxes for capital structure weight (debt, equity, WACC, etc).
Balance Sheet (Book Values)
Invested Capital (Market Values)
Liabilities and Owner\'s Capital
Current liabilities:
Accounts Payable
$8,250,000
Notes Payable
-
-
Other current liabilities
$7,266,000
Total current liabilities
$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
Owner\'s capital:
Common stock ($1 par value per share
$40,000,000
Paid-in-capital
$100,025,000
Accumulated earnings
$255,000,000
Total owner\'s capital
$395,025,000
$900,000,000
Total liabilities and owner\'s capital
$830,541,000
$1,334,091,171
Solution
Question 1:
Step 1: Evaluation the capital structure weights.
Enterprise value = Market capitalization +Debt
Market capitalization = Number of share × market value per share
= 40,000,000 × $22.50
= $900,000,000
Debt = market value of debt
= $420,000,000
Enterprise value = $900,000,000 + $420,000,000
=$1,320,000,000
Calculation of Debt/Enterprise value:
Debt = $420,000,000
Enterprise value = $1,320,000,000
= Debt/Enterprise value
= $420,000,000 / $1,320,000,000
=0.32
Calculation of Equity/Enterprise value:
Equity = $40,000,0.
Compano Inc. was founded in 1986 in Baytown, Texas. The firm provide.pdf
1. 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.
December 31, 2014
Balance Sheet (Book Values)
Invested Capital (Market Values)
Liabilities and Owner's Capital
Current liabilities:
Accounts Payable
$8,250,000
Notes Payable
-
-
Other current liabilities
$7,266,000
Total current liabilities
$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
Owner's capital:
Common stock ($1 par value per share
$40,000,000
Paid-in-capital
$100,025,000
Accumulated earnings
$255,000,000
Total owner's capital
$395,025,000
$900,000,000
Total liabilities and owner's capital
2. $830,541,000
$1,334,091,171
Capital Market Data
Treasury Bond Yield
5.42%
Market Risk Premium
5.00%
Unlevered equity beta
0.90
Stock price
22.50
Market capitalization
Yield on debt
8.00%
Bond beta
0.30
Short-term interest bearing debt
New long-term debt total
-
Tax Rate
40.00%
Question 1. Fill in the boxes for market capitalization and short-term interest bearing debt
located under the capital market data.
Step 1: Evaluation the capital structure weights
Enterprise Value = Market Capitalization + Debt
Debt/Enterprise Value
Equity/Enterprise Value
Step 2: Estimate the costs of Financing
Debt (after taxes)
Debt/Equity Ratio
Equity
Levered equity beta
Step 3: Calculate the WACC
WACC
Question 2. Fill in the boxes for steps 1 through 3.
3. Capital Structure Weight
Source of Capital
(Proportion)
After-Tax Cost
Weighted After-Tax Cost
Debt
Equity
WACC
Question 3. Fill in the boxes for capital structure weight (debt, equity, WACC, etc).
Balance Sheet (Book Values)
Invested Capital (Market Values)
Liabilities and Owner's Capital
Current liabilities:
Accounts Payable
$8,250,000
Notes Payable
-
-
Other current liabilities
$7,266,000
Total current liabilities
$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
Owner's capital:
Common stock ($1 par value per share
$40,000,000
Paid-in-capital
$100,025,000
Accumulated earnings
$255,000,000
Total owner's capital
4. $395,025,000
$900,000,000
Total liabilities and owner's capital
$830,541,000
$1,334,091,171
Solution
Question 1:
Step 1: Evaluation the capital structure weights.
Enterprise value = Market capitalization +Debt
Market capitalization = Number of share × market value per share
= 40,000,000 × $22.50
= $900,000,000
Debt = market value of debt
= $420,000,000
Enterprise value = $900,000,000 + $420,000,000
=$1,320,000,000
Calculation of Debt/Enterprise value:
Debt = $420,000,000
Enterprise value = $1,320,000,000
= Debt/Enterprise value
= $420,000,000 / $1,320,000,000
=0.32
Calculation of Equity/Enterprise value:
Equity = $40,000,000
Enterprise value = $1,320,000,000
= Equity/Enterprise value
=$40,000,000 /$1,320,000,000
=0.03
Step 2: Estimate the cost of financing:
Calculation of Debt (after taxes):
Debt after tax = (8%)-(1-0.40)
= 4.8%
Calculation of debt / Equity ratio:
= Total liabilities / Total equity
5. =$435,516,000 / $395,025,000
=1.103
Calculation of Equity:
Equity = $395,025,000
Calculation of Levered Equity beta:
Levered Equity beta = (1- Unlevered equity beta)
= (1- 0.90)
=0.10
Step 3: Calculation of WACC
= Cost of debt after tax + Cost of equity after tax
= 4.8 % + 4.352%
= 9.152%
Question 2:
Calculation of Capital structure weight:
Details
Amount
Proportion
Cost
WACC
Equity
40,000,000
0.0870
4.352
0.3784
Long term debt
420,000,000
0.9130
4.8
4.3826
460,000,000
1.0000
Details
Amount
Proportion
Cost
WACC
