COLEMAN TECHNOLOGIES INC. 10-22 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 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 25%. 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 permanent 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 (D) 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. . d. 1. Why is there a cost associated with retained earnings? 2. What is Coleman's estimated cost of common equity using the CAPM approach? no