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Traxo Manufacturing Ltd. shares are publicly traded on the Toronto Stock Exchange under the ticker symbol TRX.TO. The shares currently trade at a price of $2.25 per share. Security analysts that follow the stock have estimated it's beta coefficient to be 0.9. Traxo paid a dividend on its common stock last year that totaled $0.08 per share. Dividends have been growing at a 3.25% compound rate for the past three years and the expectation is that this growth can continue into the foreseeable future.

Traxo Manufacturing Ltd. has an important warehouse capital project to consider. The warehouse project is expected to produce annual cash flows before tax of $290,000 for each of the next twelve years. The warehouse project is thought to be of similar risk to the risk of the firm itself. It will cost Traxo $750,000 this year to get this project up and running.

Traxo has it's long-term bonds trading on public markets. The bonds are currently trading at a premium from their par value of 101.34%. These 6.35% bonds have eleven years left until they mature.

Siri Li, Traxo's manager of finance has collected current data from the firm's underwriters. The risk-free rate is estimated to 1.01%. The expected return on the S&P/TSX Capped Total Return Composite index is forecast to be 7.5% in 2020. New equity capital could be raised by the firm at the current market price, but floatation costs would amount of 5% of the value of the issue. New bonds could be sold into the market, but the floatation cost percentage would be 4%. The firm faces a corporate tax rate of 35%. If the firm goes ahead with the capital project, it will have to seek external financing.

The firm's most recent financial statements are found below:

1. Estimate the investors required rate of return on Traxos debt. (Use the approximation formula to determine the yield to maturity on outstanding bonds given the current price bonds are trading for in the market). (Demonstrate the formula and solution step by step)

2. What is the after-tax, and after-floatation cost of existing debt? (Demonstrate the formula and solution step by step)

3. Estimate the investors required rate of return (cost of retained earnings) using the constant growth dividend discount model (DDM). (Demonstrate the formula and solution step by step)

4. Estimate the investors required rate of return (cost of retained earnings) using the CAPM. (Demonstrate the formula and solution step by step)

Traxo Manufacturing Ltd. Balance Sheet As at December 31, 2019 In $ '000s Liabilities: Accruals Accounts Payable 30 312 Assets: Cash 100 Accounts Receivable 1,220 Inventories 2,450 Total Current Assets 3,770 Gross Fixed Assets 5,000 Accumulated Depreciation 1,500 342 4,000 Total Current Liabilities 6.35% bonds (due 2030) Common stock (2 million outstanding) Retained earnings TOTAL CLAIMS Net Fixed Assets TOTAL ASSETS 3,500 7,270 1,000 1,928 7,270

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