Coleman Technologies is considering a major expansion program that has been proposed by the companys 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 Colemans 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 firms tax rate is 25%.

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.

The current price of the firms 10%, $100.00 par value, quarterly dividend, perpetual preferred stock is $111.10.

Colemans common stock is currently selling for $50.00 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Colemans beta is 1.2, the yield on Tbonds 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%.

Colemans target capital structure is 30% debt, 10% preferred stock, and 60% common equity.