Coleman Technologies is considering two major expansion programs that have been proposed by the companys information technology group. Before proceeding with the expansions, the company must first estimate its weighted average cost of capital (WACC). Suppose you are the lead financial analyst on the project and your assistants have provided you with the following data, which they believe may be relevant to the task.

1. The firms tax rate = 25%.

2. For the bond: a) The current price = $1,153.72. on 1,000 par value bonds b) The coupon rate = 12% with semiannual payment. c) The years to maturity = 15 years. d) Flotation cost = 0.

3. For preferred stock: a) The current price = $30 with a dividend = $3.30 b) The par value = $100. c) Flotation cost = 0

4. For common stock: a) The current price = $55 per share. b) The current dividend (D0) = $2.10. c) Dividends are expected to grow at a constant annual rate = 9%. d) Flotation cost = 10% of the current price) e) The company's beta = 1.516. f) The yield on T-bonds = 6%. g) The market risk premium = 5%. h) Common shares outstanding = 50,000.

5. Coleman's target capital structure is 28% debt, 7% preferred stock, and 65% common equity.

The CFO wants an update and has the following 7 questions regarding WACC

1 What is the before tax cost of debt?

a. 10%

b. 7.5%

c. 3.5%

d. 4.0%

2 What is the after-tax cost of debt for Coleman?

a. 10.0%

b. 7.5%

c. 3.5%

d. 2.6%

3 What is Coleman's cost of preferred stock?

a. 5.0%

b. 6.0%

c. 11.0%

d. 4.0%

4 What is Coleman's cost of equity using the DCF approach?

a. approximately 12%

b. approximately 10%

c. approximately 14%

d. none of the other options

5 What is Coleman's cost of common equity according to the CAPM

a. approximately 12%

b. approximately 8%

c. approximately 17%

d. none of the other options

6 What is the company's overall, or weighted average cost of capital using the DCF for cost of common equity?

a. approximately 10%

b. approximately 12%

c. approximately 2%

d. approximately 15%

7 The CFO thinks that the $0 flotation cost for bonds assumption is incorrect based on a conversation with their banker. What would the after-tax cost of debt be with flotation cost = $12 per bond?

a. 8.87%

b. 10.99%

c. 15.35%

d. 7.6%

Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects: Project L and Project S. Both projects have 3-year lives.

After-tax cash flows (in millions of dollars):

Year CFL CFS

0 ($100) ($100)

1 $10 $70

2 $60 $50

3 $80 $20

the weighted average cost is approximately 12%

9. What is the NPV of Project L?

a. approximately $20 million

b. approximately $14 million

c. approximately $200 million

d. approximately $110 million

QUESTION 10

What is the NPV of Project S?

a. approximately $17 million

b. approximately $100 million

c. approximately $25 million

d. approximately $60 million

QUESTION 11

What is the IRR of Project L?

a. approximately 18%

b. approximately 25%

c. approximately 32%

d. approximately 13%

QUESTION 12

What is the IRR of Project S?

a. approximately 18%

b. approximately 24%

c. approximately 50%

d. approximately 22%

QUESTION 13

What is the MIRR for Project L?

a. approximately 17%

b. approximately 27%

c. approximately 30%

d. None of the choices

QUESTION 14

What is the MIRR for Project S?

a. approximately 18%

b. approximately 35%

c. approximately 2%

d. approximately 10%

QUESTION 15

What is the Payback period of Project L?

a. 2.9

b. 2.4

c. 1.7

d. 1.6

QUESTION 16

What is the Payback period of Project S?

a. 1.6

b. 2.4

c. 2.9

d. 1.9