Coleman Technologies is currently calculating the cost of capital for a major expansion program. We have the following information regarding the program:
• The tax rate for the duration of the program is 40% (ie. T = .40)
• New 15-year coupon bonds will be issued
— Similar 15-year, $1,000 par value, 12% coupon, semiannual noncallable bonds currently sell for $1,153.72
— New bonds will be privately placed with no flotation cost
• New preferred stock will be issued
— Similar 10%, $100 par value, quarterly dividend, perpetual preferred stock currently sells for $111.10
• Common stock sells for $50 (ie. $P_0$ = 50)
— $D_0$ = 4.19 and $g$ = .05
— $\beta$ = 1.2, $r_f$ = .07, and MRP = .06
— Bond-Yield Risk Premium = .04
• The target capital structure is 30% debt, 10% preferred, and 60% common equity