Question

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 =

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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

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

​ = ​= =

​

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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

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