Financial Management

Module 4 Assignment 2

Argosy University

Sharon H Edwards

December 4, 2015

Module 4 Assignment 2: The Weighted Average Cost of Capital

By Wednesday, December 2, 2015, 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 10 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%.

A. 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?

Component Cost for the Preferred Stock of Coogly Company

= The dividend/ (Price of Stock- Flotation Cost)

=4/(82-6)

= 5.26%

The Advantages of Preferred Stock in the Capital Structure

Stockholders have a right to receive fixed dividend payments.

Preferred stocks offer a reduced amount of risk than obligation debt has are cost lower than equity.

Preferred stocks offer an advantage of being less instability than common stocks

Preferred stock holders are no allowed to vote on company policies or having a vote in...