ASSUME THAT YOU WERE RECENTLY HIRED AS ASSISTANT TO

JERRY LEHMAN, FINANCIAL VP OF COLEMAN TECHNOLOGIES.

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:

$(1)$ THE FIRM$$S MARGINAL TAX RATE IS $40$ PERCENT.

$(2)$ THE CURRENT PRICE OF COLEMAN$$S $12$ PERCENT COUPON,

SEMIANNUAL PAYMENT, NONCALLABLE BONDS WITH $15$ YEARS

REMAINING TO MATURITY IS $$1,153\mathrm{.}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 FIRM$$S $10$ PERCENT, $$100$ PAR

VALUE, QUARTERLY DIVIDEND, PERPETUAL PREFERRED

STOCK IS $$113\mathrm{.}10.$ COLEMAN WOULD INCUR FLOTATION COSTS

OF $$2\mathrm{.}00$ PER SHARE ON A NEW ISSUE.

$(4)$ COLEMAN$$S COMMON STOCK IS CURRENTLY SELLING AT $$50$

PER SHARE. ITS LAST DIVIDEND $($D$0)$ WAS $$4\mathrm{.}19,$ AND DIVIDENDS

ARE EXPECTED TO GROW AT A CONSTANT RATE OF $5$ PERCENT

IN THE FORESEEABLE FUTURE. COLEMAN$$S BETA IS $1\mathrm{.}2,$ THE

YIELD ON TREASURY BONDS IS $7$ PERCENT, AND THE MARKET

RISK PREMIUM IS ESTIMATED TO BE $6$ PERCENT. FOR THE

BOND$-$YIELD$-$PLUS$-$RISK$-$ PREMIUM APPROACH, THE FIRM USES

A $4$ PERCENTAGE POINT RISK PREMIUM.

$(5)$ UP TO $$300,000$ OF NEW COMMON STOCK CAN BE SOLD AT A

FLOTATION COST OF $15$ PERCENT. ABOVE $$300,000,$ THE

FLOTATION COST WOULD RISE TO $25$ PERCENT.

$(6)$ COLEMAN$$S TARGET CAPITAL STRUCTURE IS $30$ PERCENT

LONG$-$ TERM DEBT, $10$ PERCENT PREFERRED STOCK, AND $60$

PERCENT COMMON EQUITY.

$(7)$ THE FIRM IS FORECASTING RETAINED EARNINGS OF $$300,000$

FOR THE COMING YEAR.