Colfax Inc. manufactures high-end ice cream makers to sell to companies across the globe. The following market data on Colfax are current and available: • Debt - 130,000 bonds outstanding, selling for 104 percent of par; the bonds have a YTM of 4.5%. The par value is $1,000. • Common stock - 9,900,000 shares outstanding, selling for $68 per share; the beta is 1.20. • Market - 7 percent expected market risk premium; 3.1 percent risk-free rate. • Tax - 34%

a. Calculate the cost of equity. Show your complete work and present your answer in % rounded to two decimal places (e.g., 12.34%). 7 pts.

b. Calculate the WACC. Present your answer as % rounded to two decimal places (e.g., 12.34%). Show your complete work and present your answer in % rounded to two decimal places (e.g., 12.34%). 8 pts.

c. Suppose Pullman Inc., Colfax's biggest competitor, has a debt-to-equity ratio of 3 but its costs of debt and equity are identical to those of Colfax's. Using 34% as the tax rate, calculate Pullman's WACC. Show your complete work and present your answer in % rounded to two decimal places (e.g., 12.34%). 7 pts.

d. Based on your answer in 3.c., is Pullman's WACC higher or lower than Colfax' WACC? Explain why it is higher/lower with supporting logic/intuition/theory.

Answer rating: 100% (QA)

SOLUTION a To calculate the cost of equity we use the Capital Asset Pricing Model CAPM Cost of Equit... View the full answer