A. (1) What sources of capital should be included when you estimate
Coleman’s WACC?
Answer: [Show S10-1 through S10-3 here.] The WACC is used primarily for
making long-term capital investment decisions, i.e., for capital
budgeting. Thus, the WACC should include the types of capital used to
pay for long-term assets, and this is typically long-term debt,
preferred stock (if used), and common stock. Short-term sources of
capital consist of (1) spontaneous, noninterest-bearing liabilities such
as accounts payable and accrued liabilities and (2) short-term
interest-bearing debt, such as notes payable. If the firm uses short-
term interest-bearing debt to acquire fixed assets rather than just to
finance working capital needs, then the WACC should include a short-
term debt component. Noninterest-bearing debt is generally not
included in the cost of capital estimate because these funds are
netted out when determining investment needs, that is, net operating
rather than gross operating working capital is included in capital
expenditures.