10 Case model 12/9/2018
PART B
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
N30
PV $1,153.72
PART C
(1) What is the firm’s cost of preferred stock?
Nominal dividend rate 10%
Dividends per year 4
Par value $100
PART D
(2) What is Coleman’s estimated cost of common equity using the CAPM approach?
β1.2
rRF 7%
PART E
What is the estimated cost of common equity using the DCF approach?
Price $50
Current dividend $4.19
Constant growth rate 5%
9/12/2022 17:18
Chapter 10. The Cost of Capital
This spreadsheet model is designed to be used in conjunction with the chapter’s integrated case and
the related PowerPoint slide presentation.
Face value $1,000
Tax rate 25%
PART F
What is the bond-yield-plus-risk-premium estimate for Coleman’s cost of common equity?
PART G
What is your final estimate for rs?
METHOD ESTIMATE
CAPM 14.20%
PART I
% Flotation cost 15%
PART J
What is Coleman’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
wd30% rd (1 – T) 7.50% WACC = wdrd(1 – T) + wprp + wcrs
wp10% rp9.00% WACC = 11.55%
(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?
“Bond yield + RP” premium 4%