Reference no: EM133072657

Question - Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

(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.

(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.

Required - To structure the task somewhat, Lehman has asked you to answer the following questions:

a. What is the market interest rate on Coleman's debt and its component cost of debt?

b. What is the firm's cost of preferred stock?