What is the bond yield plus risk premium estimate for Colemans cost of equity?

What is your final estimate for Rs?

COLEMAN TECHNOLOGIES INC. 10-22 COST OR OF CA the compae its cost to estima ing a major expansion program that has been Before proceeding with the expansion, the e you are an assistant to Jerry Lehman, the financial COST OF CAPITAL Coleman Technologies is considering a major expan proposed by the company's information technology Un Before proceeding with the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lenme vice president. Your first task is to estimate the following data, which he believes may be relevant to your task to estimate Coleman's cost of capital. Lehman has provided you with The firm's tax rate is 25%. The current price of Coleman's 12% coupon, semiannual payment, noncallable bond remaining to maturity, is $1,153.72. Coleman does not use short-term, interest-bearing coupon, semiannual payment, noncallable bonds with 15 years permanent basis. New bonds would be privately placed with no flotation con an does not use short-term, interest-bearing debt on a The current price of the firm's 10%, $100.00 par value, quarterly dividend, perpetual pre stock is $111.10. didend was $4.19 Coleman's common stock is currently selling for $50.00 per share. Its last dividend (D) was and dividends are expected to grow ata constant annual 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 estan 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk prema Coleman's target capital structure is 30% debt 10% preferred stock, and 60% common To structure the task somewhat, Lehman has asked you to answer the following questions a 1. What sources of capital should be included when you estimate Coleman's WC 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? b. What is the market interest rate on Coleman's debt and its component cost of debt? c. 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 inves- tors 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? e. What is the estimated cost of common equity using the DCF approach? f. What is the bond-yield-plus-risk-premium estimate for Coleman's cost of common equity? g. What is your final estimate for r? 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? j. What is Coleman's overall, or weighted average, cost of capital (WACC)? Ignore flotation costs. k. What factors influence Coleman's composite WACC? 1. Should the company use the composite WACC as the hurdle rate for each of its projects? Explain