Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem: Cost of capital Coleman Technologies is considering a major expansion program that has been proposed by the company's information technology group. Before proceeding with the expansion, the company must estimate cost of capital. Suppose that you are an assistant to Jerry Lehman, the financial vice president. Your first task is to determine Coleman's cost of capital. Lehman has provided you with the following information, which he believes may be relevant to your task.

[A]     The firm's tax rate is 40%.

[B]     The current price of Coleman's 12% coupon, semiannual payment, no callable bonds with 15 years remaining to maturity is 1,153.72 dollar. Coleman 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's 10%, 100 dollar par value, quarterly dividend, perpetual preferred stock is $111.10.

[D]      Coleman's common stock is currently selling for 50 dollar per share. Its last dividend (Do) 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 bond yield plus risk premium approach, the firm uses a risk premium of 4%.

[E]      Coleman's target capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity.

To structure the task somewhat, Lehman has asked you to answer the following problems.

[a] find out the firm's cost of preferred stock?

[b] Coleman's preferred stock is riskier to investors than its debt, yet the prefer red's yield to investors is lower than the yield to maturity on the debt. Do these suggest that you have made a mistake? [Clue: include taxes.]

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918993

Have any Question? 


Related Questions in Basic Finance

Compare and contrast the physical and risk characteristics

Compare and contrast the physical and risk characteristics of Treasury debt securities with municipal securities. What are the advantages and disadvantages of each for the borrower? What are the advantages and disadvanta ...

A research concludes that the number of hours of exercise

A research concludes that the number of hours of exercise per week for adults is normally distributed with a mean of 3.5 hours and a standard deviation of 3 hours. Show all work. Just the answer, without supporting work, ...

Sammies club wants to buy a 320000-square-foot distribution

Sammie's Club wants to buy a 320,000-square-foot distribution facility on the northern edge of a large midwestern city. The subject facility is presently renting for $4 per square foot. Based on recent market activity, t ...

Find relevant sources to support a business decisionchoose

Find relevant sources to support a business decision. Choose one of the following small business situations: • You own a clothing store and want to know whether to offer hats. • You own an ice cream store and want to kno ...

Comet pasta company stock currenly sells for 13750 per

Comet Pasta Company stock currenly sells for $137.50 per share. The Company JUST PAID a dividend and that dividend is not expected to grow at all for the next two years, and then it will grow at a constant rate of 10 per ...

1 when an author submits a manuscript to a journal what is

1. When an author submits a manuscript to a journal, what is the general process by which the decision whether or not to publish the paper is made? 2. Distinguish between a paper session and a poster session.

A manufacturer of cream filled donuts wants to make sure

A manufacturer of cream filled donuts wants to make sure that its automatic filling process is on target. Based on a sample of 25 donuts the mean weight of cream filling is estimated to be 15 grams with a standard deviat ...

Felix sani just received a gift from his grandfather he

Felix Sani just received a gift from his grandfather. He plans to invest in a 5-year bond issued by Nuforce Ltd that pays annual coupons of 5.5 per cent. If the current market rate is 7.25 per cent, what is the maximum a ...

Figure 942 is one depth-first presentation of the ow graph

Figure 9.42 is one depth-first presentation of the ow graph of Fig. 9.38. How many other depth-first presentations of this ow graph are there? Remember, order of children matters in distinguishing depth-first presentatio ...

1 types of depository institutions describe and compare the

1. Types of Depository Institutions. Describe and compare the three types of depository institutions. 2. Types of Non depository Institutions. List and describe the four main types of non-depository financial institution ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro