COLEMAN TECHNOLOGIES INC.

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.

(1) The firm's tax rate is 40%.

(2) Coleman borrowing is at 12% coupon with 15 years remaining to maturity at $1,153.72.

(3) Firm's preferred stock is dividend is 15% with $100.00 par value, market price of stock is $111.10.

(4) Coleman's common stock is currently selling for $50.00 per share. Its last dividend was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman's beta is 1.2, the yield on T-bonds is 3%, and the expected market return is 11%.

(5) 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.

i) What is the cost of debt.

ii) What is the firm's cost of preferred stock?

iii) What is Coleman's estimated cost of common equity using the CAPM approach?

iv) What is the estimated cost of common equity using the DCF approach?

v) Which approach should be chosen and why?

vi) What is Coleman's overall, or weighted average, cost of capital (WACC) using both approaches of equity separately?