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

Coupon rate 12%

Coupons per year 2
Years to maturity 15
Price $1,153.72
Face value $1,000
Tax rate 40%

N 30
PV $1,153.72
PMT $60
FV $1,000

rd 10.0%
rd (1 – T) 6.0%

PART C
(1) What is the firm’s cost of preferred stock?

Nominal dividend rate 10%

Dividends per year 4
Par value $100
Price $111.10 rp = Dp/Pp

rp 9.00%

PART D
(2) What is Coleman’s estimated cost of common equity using the CAPM approach?

β 1.2
rRF 7%
RPM 6% rs = rRF + (RPM)(b)

rS 14.20%

PART E
What is the estimated cost of common equity using the DCF approach?

Price $50
Current dividend $4.19
Constant growth rate 5%

D1 $4.40 rs = [D0(1 + g)/P0] + g

rs 13.80%
 PART F
What is the bond-yield-plus-risk-premium estimate for Coleman’s cost of common equity?

"Bond yield + RP" premium 4%

rs = 14.00% rs = rd + RP

PART G
What is your final estimate for rs?

METHOD ESTIMATE
CAPM 14.20%
DCF 13.80%
rd + RP 14.00% Range: 13.80% to 14.20%
Average 14.00% Midpt: 14.00%

PART I
(2) Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman
incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued
common stock, considering the flotation cost?

% Flotation cost 15%

Net proceeds after flotation $42.50 rs = [D0(1 + g)/P0(1 – F)] + g

rs 15.35%

PART J
What is Coleman’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.

wd 30% rd (1 – T) 6.00% WACC = wdrd(1 – T) + wprp + wcrs

wp 10% rp 9.00% WACC = 11.10%
wc 60% rs 14.00%