The CEO of the Colorox need your help: Colorox meakes householdes cleaners and other household goods. Colorox
Question:
The CEO of the Colorox need your help: Colorox meakes householdes cleaners and other household goods. Colorox is considering all sorts of new sanitizer, wipes, masks, and protective gear. The CEO forssees a great deal of future opportunities and he wants to be able to raise the capital fund these expansions. He has hired you for your expertise in finance. He has always great success hiring GIC graduates, therefore greatest respect for your analysis. He want you to tell him what his ideal capital structure should be given the data and constraint that his team provide you.
Your job is to analyze the situation and provide. The CEO of colorox has 2 pieces of information and a summary report. (1) Colorox ideal capital structure (2) Colorox WACC with the ideal capital structure including the component cost for the WACC calculation.
(3) A brief summary of your analysis. The CEO wants to understand how you did your analysis.
The first thing you do is collect the data. Before you leave meeting with the CEO, you ask about constraints. The CEO say I don't want to him more than 50% of my capital be debt as I don't want the risk of bankruptcy. Also, I have some preferred stock that I give to my relatives and I want to continue to have at least 10% of my capital be from that. And I want to have no more than 70% be from common equity but at least 20% should be from common equity.
Your next step is to check on the bonds that Colorox currently has. They have 3 different issues. One bond is a five year semi annual non callable bonds that has a coupon rate of 3.5% that currently sells for $1,025. One bond is a 20 year semi annual callable bonds and that has a coupon rate of 7.2% that currently sells for $1,080. And the third is a 20 year semi annual non callable bonds, with a coupon rate of 6.7% that sells for $1,089.
Your next check on the firms preferred stock and find it sells for $95 a share. The dividend payment is 6.50 per year.
Your next step is to gather assumptions that Colorox CEO want to use. She tells you that current risk free rate is 1/2% (one half of one percent) and the market return is 12.5%. She tells you that the company consider to have a risk premium of 3% more than bonds. The common stock currently paying an annual dividend of $4.24, but the firm is growing right now with the new products. The expectations is that the firm will grow dididend at 2.4% a year.
Requirements:
(1) Colorox ideal capital structure.
(2) Colorox WACC with the ideal capital structure including the component cost for the WACC calculation.
(3) A brief summary of your analysis. The CEO wants to understand how you did your analysis.