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The Weighted Average Cost of Capital

Subject: General Questions    / College life

Question

Company Information

The capital structure for the firm will be maintained and is now 10% preferred stock, 30% debt, and 60% new common stock. No retained earnings are available. The marginal tax rate for the firm is 40%.

Coogly has outstanding preferred stock That pays a dividend of \$4 per share and sells for \$82 per share, with a floatation cost of \$6 per share. What is the component cost for Coogly's preferred stock? What are the advantages and disadvantages of using preferred stock in the capital structure?
If the company issues new common stock, it will sell for \$50 per share with a floatation cost of \$9 per share. The last dividend paid was \$3.80 and this dividend is expected to grow at a rate of 7% for the foreseeable future. What is the cost of new equity to the firm? What are the advantages and disadvantages of issuing new equity in the capital structure?
The company will use new bonds for any capital project, according to the capital structure. These bonds will have a market and par value of \$1000, with a coupon rate of 6% and a floatation cost of 7%. The bonds will mature in 20 years and no other debt will be used for any new investments. What is the cost of new debt? What are the advantages and disadvantages of issuing new debt in the capital structure?
Given the component costs identified above and the capital structure for the firm, what is the weighted average cost of capital for Coogly? What are the advantages and disadvantages of using this method in the capital budgeting process?

Assignment 2 Grading Criteria    Maximum Points
Correctly calculated the cost of issuing preferred stock and explained the advantages and disadvantages of using preferred stock in the capital structure.    20
Correctly calculated the cost of issuing new equity and explained the advantages and disadvantages of issuing new equity in the capital structure.    20
Correctly calculated the cost of new debt and explained the advantages and disadvantages of issuing new debt in the capital structure.    20
Correctly calculated the weighted average cost of capital for the firm and explained the advantages and disadvantages of the using this method in the capital budgeting process.    20
Prepared an informative and accurate PowerPoint presentation which summarized the relevant and important aspects of the findings. At least one chart or graph was included and the notes section was used to clarify the talking points.    10
Written in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.    10
Total: