The Weighted Average Cost of Capital

Assignment 1: Discussion Question

Valuation of a firm’s financial assets is said to be based on what is expected in the future, in terms of the future performance of the firm, the industry, and the economy.  What types of value would you consider when assigning “value” to a firm’s stock or bond?  What is the significance of each of the different types of value in the valuation process? Use examples to support your response.

By Friday, November 29, 2013, respond to the discussion question. Submit your response to the appropriate Discussion Area

 

Assignment 2: The Weighted Average Cost of Capital

By Monday, December 2, 2013, complete the following assignment:

Coogly Company is attempting to identify its weighted average cost of capital for the coming year and has hired you to answer some questions they have about the process. They have asked you to present this information in a PowerPoint presentation to the company’s management team.  The company would like for you to keep your presentation to approximately 8 slides and use the notes section in PowerPoint to clarify your point. Your presentation should address the following questions and offer a final recommendation to Coogly. Make sure you support your answers and clearly explain the advantages and disadvantages of utilizing the weighted average cost of capital methodology. Include at least one graph or chart in your presentation.

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?

Submit your assignment to the M4: Assignment 2 Dropbox.

   

Module 4 Readings

Complete the following readings before starting work on the assignments:

· The following chapters from the textbook Foundations of financial management:

·

Valuation and Rates of Return

·

Cost of Capital

20

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10

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.
Correctly calculated the cost of new debt and explained the advantages and disadvantages of issuing new debt in the capital structure.
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.
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.
Total:	100