Reference no: EM132898078

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 analyst with Coleman Technologies and you have been tasked with estimating the different components of cost of capital. The following data has been provided to you to assist with your task.

1. The firm's tax rate is 25%.

2. For the bond: a) The current price is $1,153.72. b) The coupon rate is 12%. c) The years to maturity is 15 years. d) New bonds would be privately placed with no flotation cost.

3. For preferred stock: a) The current price is $111.10 b) The dividend rate is 10%. The par value is $100.

4. For common stock: a) The current price is $50 per share. b) The last dividend (D0) was $4.19. Dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Ignore flotation costs.

5. Coleman's target capital structure is 30% debt, 10% preferred stock, and 60% common equity.

Before Tax cost of debt =10%, after tax cost of debt= 7.5%, cost of preferred stock= 9%, common stock= 13.8%, WACC= 11.43%.

Required - Conduct a quick sensitivity analysis on the model you used to answer the previous questions. For the sensitivity analysis change (by either increasing or decreasing) the value of one of the factors which affects WACC. Describe what you changed and describe its impact on WACC. Also, hypothesize on what economic/political factors could drive such a change.