{ "key_pair_value_system": true, "answer_rating_count": "", "question_feedback_html": { "html_star": "", "html_star_feedback": "" }, "answer_average_rating_value": "", "answer_date_js": "2024-06-05T18:14:51-04:00", "answer_date": "2024-06-05 18:14:51", "is_docs_available": "", "is_excel_available": "", "is_pdf_available": "", "count_file_available": 0, "main_page": "student_question_view", "question_id": "2309409", "url": "\/study-help\/questions\/assume-that-you-were-recently-hired-as-assistant-to-jerry-2309409", "question_creation_date_js": "2024-06-05T18:14:51-04:00", "question_creation_date": "Jun 05, 2024 06:14 PM", "meta_title": "[Solved] Assume that you were recently hired as as | SolutionInn", "meta_description": "Answer of - Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first tas | SolutionInn", "meta_keywords": "assume,recently,hired,assistant,jerry,lehman,financial,vp,coleman,technologies,first,task", "question_title_h1": "Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Colemans cost of", "question_title": "Assume that you were recently hired as assistant to Jerry Lehman, financial", "question_title_for_js_snippet": "Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies Your first task is to estimate Colemans cost of capital Lehman has provided you with the following data, which he believes is relevant to your task (1) The firms marginal tax rate is 40 (2) The current price of Colemans 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 permanent basis New bonds would be privately placed with no flotation cost (3) The current price of the firms 10 , $100 par value, quarterly dividend, perpetual preferred stock is $113 10 Coleman would incur flotation costs of $2 per share on a new issue (4) Colemans common stock is currently selling at $50 per share Its last dividend (D 0 ) was $4 19, and dividends are expected to grow at a constant rate of 5 in the foreseeable future Colemans beta is 1 2, the yield on Treasury 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 four percentage point risk premium (5) Up to $300,000 of new common stock can be sold at a flotation cost of 15 Above $300,000, the flotation cost would rise to 25 (6) Colemans target capital structure is 30 long term debt, 10 preferred stock, and 60 common equity (7) The firm is forecasting retained earnings of $300,000 for the coming year To structure the task somewhat, Lehman has asked you to answer the following questions a (1) What sources of capital should be included when you estimate Colemans weighted average cost of capital (WACC) (2) Should the component costs be figured on a before tax or an after tax basis Explain (3) Should the costs be historical (embedded) costs or new (marginal) costs Explain b What is the market interest rate on Colemans debt and its component cost of debt c (1) What is the firms cost of preferred stock (2) Colemans preferred stock is riskier to investors than its debt, yet the 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 )", "question_description": "

Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Colemans cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task:<\/span><\/p>

(1)<\/strong>The firms marginal tax rate is 40%.<\/span><\/p>

(2)<\/strong>The current price of Colemans 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 permanent basis. New bonds would be privately placed with no flotation cost.<\/span><\/p>

(3)<\/strong>The current price of the firms 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue.<\/span><\/p>

(4)<\/strong>Colemans common stock is currently selling at $50 per share. Its last dividend (D<\/span>0<\/sub>) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Colemans beta is 1.2, the yield on Treasury 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 four percentage point risk premium.<\/span><\/p>

(5)<\/strong>Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%.<\/span><\/p>

(6)<\/strong>Colemans target capital structure is 30 %long-term debt, 10% preferred stock, and 60% common equity.<\/span><\/p>

(7)<\/strong>The firm is forecasting retained earnings of $300,000 for the coming year.<\/span><\/p>

To structure the task somewhat, Lehman has asked you to answer the following questions:<\/p>

a. (1) <\/strong>What sources of capital should be included when you estimate Colemans weighted average cost of capital (WACC)?<\/span><\/p>

<\/span>(2) <\/strong>Should the component costs be figured on a before-tax or an after-tax basis? Explain.<\/span><\/p>

<\/span>(3) <\/strong>Should the costs be historical (embedded) costs or new (marginal) costs? Explain.<\/span><\/p>

b. <\/strong>What is the market interest rate on Colemans debt and its component cost of debt?<\/span><\/p>

c. (1) <\/strong>What is the firms cost of preferred stock?<\/span><\/p>

<\/span>(2) <\/strong>Colemans preferred stock is riskier to investors than its debt, yet the yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (<\/span>Hint: <\/em>Think about taxes.)<\/span><\/p>", "transcribed_text": "", "related_book": { "title": "Principles of Finance", "isbn": "9781305178045, 1285429648, 1305178041, 978-1285429649", "edition": "6th edition", "authors": "Scott Besley, Eugene F. Brigham", "cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/352.jpg", "uri": "\/textbooks\/principles-of-finance-6th-edition-352", "see_more_uri": "\/textbooks\/business-international-investments-3398" }, "free_related_book": { "isbn": "B0CSDQRRS4", "uri": "\/textbooks\/ufos-past-present-and-future-what-they-dont-want-you-to-know-1st-edition-979-8876162724-290060", "name": "Ufos Past Present And Future What They Dont Want You To Know", "edition": "1st Edition" }, "question_posted": "2024-06-05 18:14:51", "see_more_questions_link": "\/study-help\/questions\/business-human-resource-management-2020-May-22", "step_by_step_answer": "The Answer is in the image, click to view ...", "students_also_viewed": [ { "url": "\/a-university-researcher-asks-students-to-participate-in-an-experiment", "description": "A university researcher asks students to participate in an experiment that takes 4 hours to complete in the last week of a semester. 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