What is the firm's cost of debt for WACC purposes?\ What is the firm's cost of preferred stock?\ 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,

r_(s)

?\ Is this the cost of retained earnings or the cost of newly issued common stock? Why is there a cost associated with retained earnings?\ How does Coleman's target capital structure compare with its current market value capital structure?\ 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 flotation cost of

15%

. Above

$300,000

, the flotation cost would rise to

25%

.\ What is the WACC after retained earnings have been exhausted and Coleman issues up to

$300,000

of new common stock with a

15%

flotation cost?\ (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC)\ What is the WACC if more than

$300,000

of new common equity is sold?\ (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC)\ Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings. Under which conditions would it not be appropriate to use internal funding rather than external funding for projects?\ Marginal Cost of Capital (MCC) Schedule (20 points)\ What is a marginal cost of capital (MCC) schedule? Construct a graph that shows Coleman's MCC schedule. Assume that the 30/10/60 target capital structure will be maintained.\ Suppose you learned that Coleman could raise only

$210,000

of new debt at a

10%

interest rate and that new debt beyond 210,000 would have yield to investors of

12%

. Trace back through your work and explain how this new fact would change the MCC schedule.\ The Cost of Capital Used in The Capital Budgeting Process [Bonus - 10 points]\ Coleman's director of capital budgeting has identified the following potential projects:\ \\\\table[[Project,Cost,Life,Cash Flow,IRR],[A,

$700,000

,5 years,

$218,795

,

17.0%

2) What is the firm's cost of debt for WACC purposes? 3) What is the firm'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 flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%. 7) What is the WACC after retained earnings have been exhausted and Coleman issues up to $300,000 of new common stock with a 15% flotation cost? (Hint: Calculate the new cost 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 cost of equity, using the DCF method, then find new WACC) 9) Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings. Under which conditions would it not be appropriate to use internal funding rather than external funding for projects? Marginal Cost of Capital (MCC) Schedule (20 points) 10) What is a marginal cost of capital (MCC) schedule? Construct a graph that shows Coleman's MCC schedule. Assume that the 30/10/60 target capital structure will be maintained. 11) Suppose you learned that Coleman could raise only $210,000 of new debt at a 10% interest rate and that new debt beyond 210,000 would have yield to investors of 12%. Trace back through your work and explain how this new fact would change the MCC schedule. The Cost of Capital Used in The Capital Budgeting Process [Bonus - 10 points] Coleman's director of capital budgeting has identified the following potential projects: Project B and B* are mutually exclusive, whereas the other projects are independent. All of the projects are equally risky. 12) Plot the investment opportunity schedule (IOS) on the same graph that contains your MCC schedule in question (10). What is the firm's marginal cost of capital for capital budgeting purposes? 13) What are the included projects in Coleman's optimal capital budget? Explain your answer fully