Question

Coleman Technologies Inc. Cost of Capital A.​(1)​What sources of capital should be included when you estimate...

Coleman Technologies Inc.

Cost of Capital

A.(1)What sources of capital should be included when you estimate Coleman’s WACC?

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

Enter N, PV, PMT, and FV, and solve for I/YR

rd(1 – T)

C.​(1)​What is the firm’s cost of preferred stock?


rp =

________________________


D.​(1)​Why is there a cost associated with retained earnings?

D.​(2)​What is Coleman’s estimated cost of common equity using the CAPM approach?


​rs​= rRF + (rM – rRF)b


________________________


E.​​What is the estimated cost of common equity using the DCF approach?

​ = ​= =


________________________


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?

I.​(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?


re = + g


J.​​What is Coleman’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.


WACC​= wdrd(1 – T) + wprp + wcrs


Homework Answers

Answer #1

Ans (A) 1- To Get Colesman wacc formula : we have to Add : 30% Debt,10% preference stock,60% common equity .

(B) Market interest rate of debt is suppose 8% then we should choose debt wacc as under

   KD=8/110*100 =7.27% & suppose tax rate is 30% (1-tax rate)

7.27(1-30%)=5.089% is answer.

(c) C Cost of Preferred stock is kp = wacc=(kd)+(ke)+(kp)

30%+60%+10%=100%

   then it will be = 1% of total wacc if it assume straight line. Answer

(D) 1 Cost associated with retained earning due to opportunity cost of proper investment which gives return over and above wacc+desired aquirment .(i.e not investing in profitable investment/stock/plant & machinery etc.)

(D) 2 wacc Cost of common equity in coleman model under capm is

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that you were recently hired as assistant to Jerry Lehman, financial vp of Coleman technologies....
Assume that you were recently hired as assistant to Jerry Lehman, financial vp of Coleman technologies. 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 marginal tax rate is 40 percent. The current price of Coleman’s 12 percent 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...
Vandelay Industries is considering four average risk projects with information below related to their rates of...
Vandelay Industries is considering four average risk projects with information below related to their rates of return. Determine Vandelay Industries' WACC. INPUTS USED IN THE MODEL Tax rate 30% B-T rd 8% Net Pps $35.00 Dps $5.00 P0 $50.00 D1 $2.50 g 5% Vandelay's beta 1.1 Market risk premium, RPM 7.50% Risk free rate, rRF 3.0% Target capital structure from common stock 60% Target capital structure from preferred stock 15% Target capital structure from debt 25% Calculate the cost of...
You were hired as a consultant to AICC Company, whose target capital structure calls for 30%...
You were hired as a consultant to AICC Company, whose target capital structure calls for 30% debt, 5% preferred, and 65% common equity. The Company’s common stock currently sells at $20 per share and just paid $1 annual dividend per share (D1). The dividend is expected to grow at a constant rate of 5% a year. (10 pts) Using the DCF model, what is the company’s cost of common equity. If the firm’s beta is 1.2, the risk-free rate ,rfr...
Before-tax cost of debt (B-T rd) 8% Tax rate 34% Net Price of Preferred stock (after...
Before-tax cost of debt (B-T rd) 8% Tax rate 34% Net Price of Preferred stock (after deducting floatation costs) $32.00 Dividend per share of Preferred $3.40 Current price of Common stock stock $52.00 Dividend paid in the recent past for Common $2.50 Growth rate 6% Stock Beta 0.81 Market risk premium, (MRP) 6.2% Risk free rate ( rf ) 5.5% Flotation cost for common stock 5% Weight of debt in the target capital structure 40% Weight of preferred stock in...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The stock of Gao Computing sells for $50, and last year's dividend was $3.13. Security analysts...
The stock of Gao Computing sells for $50, and last year's dividend was $3.13. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. A flotation cost of 10% would be required to issue new common stock. Gao's preferred stock sells for $32.61, pays a dividend of $3.30 per share, and new preferred stock could be sold with a flotation cost of 8%. The firm has outstanding bonds with 20 years to maturity,...
Mannheim Biotechnology Limited is expanding the business by considering investing in some profitable projects. Stevenson, a...
Mannheim Biotechnology Limited is expanding the business by considering investing in some profitable projects. Stevenson, a project manager of Mannheim was asked to estimate the cost of capital and evaluate the following projects year 0 1 2 3 4 Project A (100.00) 10.00 50.00 40.00 20.00 Project B (200.00) 80.00 90.00 85.00 10.00 Project C (300.00) 105.00 90.00 110.00 20.00 Albert, the Chief Financial Officer (CFO) of Mannheim has provided him some relevant information. The current bond price of Mannheim’s...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT