Part 2. The Cost of Capital ( 60 points) Given the following: (a) The firm's marginal tax rate is 40%. (b) The current price of Coleman's 12% coupon, semiannual payment, noncullable $1,000 face value bonds with 15 years remaining to maturity is $1,153.72. The firm does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. (c) The current price of the firm $9%,$100 par value, quarterly dividend, perpetual preferred stock is $105. Coleman would incur tlotation costs equal to 4.8% of the proceeds on a new issue. (d) Coleman's common stock is currently selling at $50 per share. Its last dividend (Dn) was $4.19, and dividends are expected to grow at a constant 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 own-bondyield-plus-risk-premium approach, the finn uses a 4% judgmental risk premium. (e) Coleman's target cupital structure is 30\% long-term debt, 10% preferred stock, and 60% common equity, (f) There are 70,000 bonds outstanding, 200,000 preferred shares outstanding, and 3 million common shares outstanding. Page 1 of 2 Weighted Average Cost of Capital (WACC) (40 points). To find this, answer the following questions: 1) What sources of capital should be included when you estimate Coleman's WACC? 2) What is the firm's cost of debt for WACC purposes? 3) What is the tirm's cost of preferred stock? 4) Assume for now that Coleman Corp. does not plan to issue new shares of common stock. Find Coleman's estimate cost of equity using: (a) the CAPM approach; (b) the dividend growth approach; and (c) the own-bond-yield-plus-judgmental-risk-premium method. What is your final estimate for the cost of equity, rs ? Is this the cost of retained earnings or the cost of newly issued common stock? Why is there a cost associated with retained earnings? 5) How does Coleman's target capital structure compare with its current market value capital structure? 6) What is Coleman's weighted average cost of capital (WACC)? The firm is forecasting its retained earnings equal to $300,000 in the coming year. Once retained earnings have been exhausted, Coleman plans to issue new shares of common stocks to raise capital. Up to $300,000 of new common stock can be sold at a llotation cost of 15%. Above $300,000, the llotation cost would rise to 25%. 7) What is the WACC after retained carnings have boen cxhausted and Coleman issues up to $300,000 of new common stock with a 15% flotation cost? (Hint: Calculate the new cast of equity, using the DCF method, then find new WACC) 8) What is the WACC if more than $300,000 of new common equity is sold? (Hint: Calculate the new cast of equity, using the DCF method, then find new WACC) 9) Explain in words why new common stock that is raised cxternally has a higher percentage cost than equity that is raised internally as retained carnings. Under which conditions would it not be appropriate to use internal funding rather than external funding for projects