Coleman Essay

1428 Words6 Pages
Section I Introduction Coleman Technologies is considering a major expansion program that has been proposed by the company’s information technology group. This report examines the estimated cost of capital necessary for proceeding with the expansion. Section II Assumptions The financial vice president, Jerry Lehman, provided the following assumptions for the analysis: 1. The firm’s tax rate is 40% 2. The current price of Coleman’s 12% coupon, semiannual payment, noncallable bonds with 15 years 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. 3. The current price of the firm’s 10%, %100.00 par value, quarterly dividend, perpetual preferred stock is $111.10. 4. Coleman’s common stock is currently selling for $50.00 per share. Its last dividend was $4.19, and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Coleman’s 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%. 5. Coleman’s target capital structure is 30% debt, 10% preferred stock, and 60% common equity. Section III Weighted Average Cost of Capital & Other Models The Weighted Average Cost of Capital, or WACC, is an investment analysis method used in capital budgeting for assessing long-term investments. The WACC is made up of all the different types of capital used to finance long-term assets. Typically capital used for financing investments comes from debt taken on by issuing stock, but can also come from short term debt in accounts payable and notes payable. Shareholders are mainly concerned with the cash flows associated with dividends. Coleman Technologies pays its dividends with after-tax
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