Question b - d

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 on a per manent basis. New bonds would be privately placed with no flotation cost. . The current price of the firm's 10%, $100.00 par value, quarterly dividend, perpetual preferred stock is $111.10. Coleman's common stock is currently selling for $50.00 per share. Its last dividend (D) was $4.19, 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 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: 1. What sources of capital should be included when you estimate Coleman's WACC? 2. Should the component costs be figured on a before tax or an after-tax basis? 3. Should the costs be historical (embedded) costs or new (marginal) costs? What is the market interest rate on Coleman's debt and its component cost of debt? 1. What is the firm's cost of preferred stock? 2. Coleman's preferred stock is riskier to investors than its debt, yet the preferred's yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.) 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? namit using the DCF approach? a. b. C