COST OF CAPITAL Coleman Technologies is considering a major expansion program that has been proposed by the comparry's information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose 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 The firm's tax rate is 40% *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 ona permanent basis New bonds would be privately placed with no flotation cost -The curent price of the firm's 10%, $100 00 par value, quarterly dv dend p rpetual preferred stock is $111.10. Coleman's common stock is currently selling for $5000 per share. Its last dividend DO was $4.19, and dmdends are expected to grow at a constant annual rate of 5% in the foreseeable future. Coleman's beta is 12, the yield on T-bonds is 796, 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% 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 A. What sources of capital should be included when you estimate Coleman's WACC? B. What is the market interest rate on Coleman's debt and its component cost of debt? C. What is the firm's cost of preferred stock D. (1) Why is there a cost associated with retained earnings? (2) What is Coleman's estimated cost of common equity using the CAPM approach? E. What is the estimated cost of common equity using the DCF approach? H. Explain in words why new common stock has a higher cost than retained earnings I (1) What are two approaches that can be used to adjust for flotation costs? (2) Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost? What is Coleman's overall, or weighted average, cost of capital (WACC)? Ignore flotation costs