Reference no: EM131921135

During the last few years, Colman Technologies has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice-president. Your first task is to estimate Colman Technologies’ cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: 1. The firm's tax rate is 35 percent. 2. The current price of Colman Technologies 8 percent coupon, semiannual payment, noncallable bonds with 16 years remaining to maturity is $1,053.72. Colman Technologies does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. 3. The current price of the firm’s 8 percent, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Colman Technologies would incur flotation costs equal to 5 percent of the proceeds on a new issue. 4. Colman Technologies’ common stock is currently selling at $60 per share. Its last dividend (d0) was $3.39, and dividends are expected to grow at a constant rate of 10 percent in the foreseeable future. Colman Technologies’ beta is 1.2; the yield on t-bonds is 7 percent; and the market risk premium is estimated to be 6 percent. For the bond-yield-plus-risk-premium approach, the firm uses a 4 percentage point risk premium. 5. Colman Technologies’ target capital structure is 50 percent long-term debt, 10 percent preferred stock, and 40 percent common equity. 1. What is the market interest rate on Colman Technologies’ debt and its component cost of debt? A. Draw a time line B. List the variables c. Compute the interest rate on Colman’s debt D. What is Colman’s component cost of debt (After Cost of Debt) 2. What is the firm's cost of preferred stock? A. List the variables B. Compute's cost of preferred stock? 3. Colman Technologies doesn’t plan to issue new shares of common stock. Using the CAPM approach, what is Colman Technologies’ estimated cost of equity? 4. What is the estimated cost of equity using the discounted cash flow (DCF) approach? a. List the variables b. Compute the cost equity using DCF approach 5. What is the cost of equity based on the bond-yield-plus-risk-premium method? 6. What is your final estimate for the cost of equity, rs? 7. What is Colman Technologies’ weighted average cost of capital (WACC)? a. WACC= wdrd(1 - T) + wpsrps + wce(rs) b. Capital Structure Weight Cost (Rate) WACC b.