Cost of retained earnings using discounted cash flow

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Reference no: EM132020266

Your first task is to estimate Coleman's cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task:

(1) The firm's marginal tax rate is 40%.

(2) The current price of Coleman's 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. New bonds would be privately placed with no flotation cost.

(3) The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue.

(4) Coleman's common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman's beta is 1.2, the yield on Treasury 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 four-percentage point risk premium.

(5) Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%.

(6) Coleman's target capital structure is 30 %long-term debt, 10% preferred stock, and 60% common equity.

(7) The firm is forecasting retained earnings of $300,000 for the coming year.

E. What is the estimated cost of retained earnings using the discounted cash flow (DCF) approach?

F. What is the bond-yield-plus-risk-premium estimate for Coleman’s cost of retained earnings?

G. What is your final estimate for rs?

H. What is Coleman’s cost for up to $300,000 of newly issued common stock, re1? What happens to the cost of equity if Coleman sells more than $300,000 of new common stock?

I. Explain in words why new common stock has a higher percentage cost than retained earnings.

J. What is Coleman’s overall, or weighted average, cost of capital ( WACC) when retained earnings are used as the equity component?

K. What is the WACC after retained earnings have been exhausted and Coleman uses up to $300,000 of new common stock with a 15% flotation cost?

I need help on questions 7(E), 7(F), 7(G), 7(H), 7(I), 7(J), 7(K),

Reference no: EM132020266

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