Earnings and common equity capital for wacc

Assignment Help Finance Basics
Reference no: EM1315823

Cost associated to retained earnings and common equity capital for WACC.

Cost of capital Coleman Technologies is considering a major expansion program that has been proposed by the company's information technology group. Before proceeding with the expansion, the company must estimate cost of capital. Assume that you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Coleman's cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task.

1) The firm's tax rate is 40 percent.

2) The current price of Coleman's 12 percent coupon, semiannual payment, no callable bonds with 15 years remaining 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 percent, $100 par value, quarterly dividend, perpetual preferred stock is $111.10.

4) Coleman's common stock is currently selling for $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5 percent in the foreseeable future. Coleman's beta is 1.2, the yield on T-bonds is 7 percent, and the market risk premium is estimated to be 6 percent. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4 percent.

5) Coleman's target capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity.

To structure the task somewhat, Lehman has asked you to answer the following questions.

(1)  Why is there a cost associated with retained earnings?

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

Reference no: EM1315823

Evaluate the development of the capital asset pricing model

Evaluate the development of the Capital Asset pricing Model (CAPM) in a paper. Identify and analyze the different applications to the CAPM. Be clear in illustrating how the

What requires reserves ratio is implied

A bank has $ 10 million in vault cash and $ 110 million in deposits. If total bank reserves were $ 15 million with $ 2 million considered to be excess reserves, what require

Ability to successfully compete in the marketplace

Businesses have to make many financial decisions that have a direct impact on operations and the ability to successfully compete in the marketplace. Base your writing on the

Statistical measures of standalone risk

Risk and the probabilities event occurrence vary under different circumstances. To identify an average expected return under a range of different possible outcomes, calculat

Discuss capital budgeting techniques

Discuss capital budgeting techniques including: the Payback Rule, IRR, NPV, and the Profitability Index. Be sure to discuss the advantages and disadvantages of each one.

How much of the return came from dividend yield and how much

You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today. What was your realized return? How much of the re

Compute the approximate annual rate of return on investment

Compute the approximate yearly rate of return on investment of the following cash discount terms, Compute the amount of interest income received by Husemann Corporation.

What would the dividend be in 2012

In 2011 Baxter International (BAX-$57.02) earned $3.88 per share and paid a dividend of $1.27 per share. The company expects to earn 4.31 per share in 2012. Assuming BAX wou


Write a Review

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd