# Weighted Average Cost of Capital

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%.

1. 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?
2. 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?
3. 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?
4. 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?

Format

Introduction

Issue A narrative

Issue A calculation with answer highlighted

Issue B narrative

Issue B calculation with answer highlighted

Continue with each question narrative

Continue with each calculation with answer highlighted

Conclusion

Remember the slide must be at least 10 slides with notes. I would suggest setting the assignment up as follows:

Cover slide

A slide for each question A – D.  You might put the calculations and answer on one slide and then use another slide to list advantages and disadvantages.  You could discuss and explain these slides in the Notes of the Power Point.

Offer a final recommendation on a slide.  Support your work.

Include one chart or graph on a slide.  For this you could use the interest rates you have calculated.  Discuss and explain them in the Notes.

A references slide.

A final ‘The End’ slide.