Question
Coleman Technologies is considering two major expansion programs that have been proposed by the company's information technology group. Before proceeding with the expansions, the company
Coleman Technologies is considering two major expansion programs that have been proposed by the company's 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 firm's 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%. 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. Question 1
What is the before tax cost of debt?
| a. | 10% | |
| b. | 7.5% | |
| c. | 3.5% | |
| d. | 4.0% |
2. QUESTION 2
What is the after tax cost of debt for Coleman?
| a. | 10.0% | |
| b. | 7.5% | |
| c. | 3.5% | |
| d. | 2.6% |
3.QUESTION 3
What is Coleman's cost of preferred stock?
| a. | 5.0% | |
| b. | 6.0% | |
| c. | 9.0% | |
| d. | 4.0% |
4. QUESTION 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. QUESTION 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. QUESTION 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% |
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Principles of Economics
Authors: Robert Frank, Ben Bernanke
5th edition
73511404, 978-0073511405
