Question

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 its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task. • 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 permanent 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 D0 was $4 19, and dividends are expected to grow at a 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 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

What is the market interest rate on Coleman’s debt and its component cost of debt

Answer 1