Coleman Technologies Inc.

Section I: Introduction

Coleman Technologies Inc. (CTI) is currently considering a major expansion

arrangement that has been proposed by the company’s information technology sector. CTI’s cost

of capital will be examined in the following analysis to get a better understanding of whether or

not CTI should proceed with the expansion.

A. The Purpose of This Analysis

The following pages contain the information required to estimate CTI’s cost of capital.

The firm’s tax rate is currently at 40 percent. The current price of CTI’s 12 percent coupon,

semiannual payment, non-callable bonds with 15 years remaining to maturity is currently

$1,153.72. The firm does not exercise the use of short-term interest bearing debt on a regular

basis and new bonds would be privately placed with no flotation cost. Currently, the price of

CTI’s 10 percent, $100.00 par value, quarterly dividend, perpetual preferred stock is at $111.10.

CTI’s common stock currently trades for $50.00 per share and the last dividend was $4.19,

which are expected to grow at a constant rate of 5 percent in the near future. The firm’s beta is

currently at 1.2, the yield on T-bonds is 7 percent, and the market risk premium is estimated at 6

percent. CTI uses a risk premium of 4 percent for the bond-yield-plus-risk-premium approach,

and the firms target capital structure is 30 percent debt, 10 percent preferred stock, and 60

percent of common equity.

Section II: Addressed Questions

A. Sources of Capital for WACC

The weighted average cost of capital (WACC) is normally used for making capital

budgeting investment decisions. Long-term debt plays a major role in the source of capital when

using the WACC. The sources of capital should include anything used to pay for long-term

assets; such as preferred stock and/or common stock. Furthermore if the firm decides to use any

type of short-term debt than that needs to be accounted for as well in the WACC. The...