Question Answer & Explanation Related Questions Related Textbooks Related Courses

Question 숤 Answered step-by-step

Asked by majdo0ona

COst OF CapItaL Coleman Technologies is considering a major...

COst OF CapItaL 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. Suppose 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. 
The firm's tax rate is 40%.
The current price of Coleman's 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity, is $1,153.72.
Coleman does not use short-term, interest-bearing debt on a per- manent basis. New bonds would be privately placed with no flotation
cost.
The current price of the firm's 10%, $100.00 par value, quarterly dividend, perpetual preferred stock is $111.10.
Coleman's common stock is currently selling for $50.00 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a
constant annual rate of 5% in the foreseeable future. Coleman's beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is
estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4%.
Coleman's target capital structure is 30% debt, 10% preferred stock, and 60% common equity.
To structure the task somewhat, Lehman has asked you to answer the following questions:
1. 1. What sources of capital should be included when you estimate Coleman's WACC?

2. Should the component costs be figured on a before-tax or an after-tax basis?

3. Should the costs be historical (embedded) costs or new (marginal) costs?

4. What is the market interest rate on Coleman's debt and its component cost of debt?

c. 1. 2.
d. 1. 2.
What is the firm's cost of preferred stock?
Coleman's preferred stock is riskier to investors than its debt, yet the preferred's yield to investors is lower than the yield to maturity on the
debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.)
Why is there a cost associated with retained earnings?
What is Coleman's estimated cost of common equity using the CAPM approach?
1. What is the estimated cost of common equity using the DCF approach?

2. What is the bond-yield-plus-risk-premium estimate for Coleman's cost of common equity?

3. What is your final estimate for rs?

4. Explain in words why new common stock has a higher cost than retained earnings.

5. 1. What are two approaches that can be used to adjust for flotation costs?

6. 2. Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman incorporates the flotation costs into
the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?

7. What is Coleman's overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.

8. What factors influence Coleman's composite WACC?

9. Should the company use the composite WACC as the hurdle rate for each of its projects? Explain. 

Business Finance 섈 쉋

Answer & Explanation Solved by verified expert 숨 Rated 싙 Helpful

Answered by ShuvoDas75

Answers with explanation are given in the explanation part...

Step-by-step explanation
Question Answer & Explanation Related Questions Related Textbooks Related Courses

섘
Question Answer & Explanation Related Questions Related Textbooks Related Courses

섘
Question Answer & Explanation Related Questions Related Textbooks Related Courses

Image transcription text

섘 ili] Two approaches that mag.r he use to account for flotation costs: 1.]
Add
the cost to the project or investment cost For example: If a project costs
$11] million and the firm expects to incur $1 million flotation cos...
Show more

6
Search Expert Help Study Resources Upgrade S
Question Answer & Explanation Related Questions Related Textbooks Related Courses

Student reviews 싙 100% (4 ratings)

Is this answer helpful? Helpful 싙 Unhelpful 싗

Report this answer
 Question Answer & Explanation Related Questions Related Textbooks
Add to library Related Courses

Business / Finance / COst OF CapItaL Coleman Technologies

Related Answered Questions

숵 Q: A bond that matures in 8 years has a par value of $1,000 and an annual coupon payment of $70; its market interest rate i

숵 Q:  . 'The COMB—19 pandemic severelyf hurt Meghan and other supermarket retailers, as social distancing and general travel

숵 Q: Coleman Technologies is considering a major expansion program that has been proposed by the company's information techno

숵 Q:  . "As shown in Exhibit 1, Matahari has no COO within its executive ranks; nor does it have presidents of divisions

숵 Q: Coleman Technologies is considering two major expansion programs that have been proposed by the company's information te

See more 쇵

Can't find your question?

Ask a new question

숥 We have related textbook solutions for you!

This textbook contains questions and

solutions related to the question you are
viewing.

Chapter 14 / Exercise ST-3

Fundamentals of Financial Management

Brigham

Expert Verified
Browse all Textbook Solutions

View Solutions

Related Course Resources

BA 5310 BA 3320

Texas A&M International Univ… Texas A&M International Univ…

섵 122 Documents 섵 72 Documents

❓ 11 Question & Answers ❓ 10 Question & Answers

솩 솩 솩 솩 솩 솩
 Question Answer & Explanation Related Questions Related Textbooks Related Courses
Company Get Course Hero Careers

About Us iOS Leadership

Scholarships Android Careers

Sitemap Chrome Extension

Q&A Archive Educators

Standardized Tests Tutors

Education Summit

Help Legal Connect with Us

Contact Us Copyright Policy College Life

FAQ Academic Integrity Facebook

Feedback Our Honor Code Twitter

Privacy Policy LinkedIn

Terms of Use YouTube

Attributions Instagram

Copyright © 2023. Course Hero, Inc.

Course Hero is not sponsored or endorsed by any college or university.