Question

1. Coleman Technologies is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Assume that you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task. Answer the following questions and SHOW YOUR CALCULATIONS. The firm’s tax rate is 28%.

A) The current price of Coleman’s 14% coupon rate, with annual payments, non-callable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. What is the firm’s after-tax cost of new debt, if issued today?

B) The current price of the firm’s preferred stock is $111.10, and the dividend is $10. What is the cost of preferred stock today, based on outstanding stock (and no flotation costs)?

C) Coleman’s common stock is currently selling for $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. There are no flotation costs. What is the new cost of common equity today?

D) Coleman’s target capital structure is 30% debt, 10% preferred stock, and 60% common equity. What is Coleman’s overall, or weighted average, cost of capital (WACC)? Include stock flotation costs for common equity.

Answer 1