80.2K

Verified Solution

Link Copied!

Coleman Technologies is considering a major expansion program that has been proposed by the companys 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 Colemans cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task. The firms tax rate is 40%. The current price of Colemans 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 firms 10%, $100 00 par value, quarterly dividend, perpetual preferred stock is $111 10. Colemans 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. Colemans 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%. Colemans target capital structure is 30% debt, 10% preferred stock, and 60% common equity What is your estimate for Rs

Answer & Explanation Solved by verified expert

See Answer