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. 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. You have been provided the following information: 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 Coleman's target capital structure is 30% debt, 10% preferred stock, and 60% common equity. Coleman Technologies Inc. Cost of Capital Target Capital Structure Debt Preferred Debt wd Rd Yellow = cells you need to input Green = cells you need to calculate Light blue = answers you need for D2L 0% PV = I= ? Pmt = Equity tax rate Total Capital 0% cost of debt N= FV = 1) what is the cost of debt relative to the firm's total capital? 0.00% Preferred Wp Rp 0% 0% Dp Pp = 0.00% 2) what is the cost of preferred stock relative to the firm's total capital? cost of preferred Rp = 3) what is the cost of equity relative to the firm's total capital? 0.00% 0.00% Equity We Re cost of equity 0% 0.00% bond yield risk premium 4) what is Coleman Technologies' WACC? 0.00% Re 5) What is Coleman Technologies' WACC if the capital structure shifts to 40% debt and 60% equity? 0.00% WACC For Rd (cost of debt), you have to get the yield to maturity. Don't forget this is a semiannual bond; check your payments, periods, and interest. Look on slide 16 of the chp 10 deck for help on getting Rp For Re, use the bond yield + risk premium method (slide 21, chp 10) 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. 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. You have been provided the following information: 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 Coleman's target capital structure is 30% debt, 10% preferred stock, and 60% common equity. Coleman Technologies Inc. Cost of Capital Target Capital Structure Debt Preferred Debt wd Rd Yellow = cells you need to input Green = cells you need to calculate Light blue = answers you need for D2L 0% PV = I= ? Pmt = Equity tax rate Total Capital 0% cost of debt N= FV = 1) what is the cost of debt relative to the firm's total capital? 0.00% Preferred Wp Rp 0% 0% Dp Pp = 0.00% 2) what is the cost of preferred stock relative to the firm's total capital? cost of preferred Rp = 3) what is the cost of equity relative to the firm's total capital? 0.00% 0.00% Equity We Re cost of equity 0% 0.00% bond yield risk premium 4) what is Coleman Technologies' WACC? 0.00% Re 5) What is Coleman Technologies' WACC if the capital structure shifts to 40% debt and 60% equity? 0.00% WACC For Rd (cost of debt), you have to get the yield to maturity. Don't forget this is a semiannual bond; check your payments, periods, and interest. Look on slide 16 of the chp 10 deck for help on getting Rp For Re, use the bond yield + risk premium method (slide 21, chp 10)
