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problem: Cost of capital Coleman Technologies is considering a major expansion program that has been proposed by the firm's information technology group. Before proceeding with the expansion, the firm must determine cost of capital. Suppose that you are an assistant to Jerry Lehman, financial vice president. Your 1st task is to estimate Coleman's cost of capital. Lehman has provided you with the following information, which he believes may be relevant to your task.

[A] The company'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. 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 par value, quarterly dividend, perpetual preferred stock is $111.10.

[D] Coleman's common stock is currently selling for $50 per share. Its last dividend (D_0) 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 company uses a risk premium of 4%.

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

(1) Determine what factors influence Coleman's composite WACC?

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M922485

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