A guide to assignment on the Comic Book Publication group and their attempt to acquire additional capital through public debt offering and its impact on their cost of capital. Detailed calculations with sufficient references for a total of 4 pages
The Comic Book Publication Group (CBPG) is a small but publicly traded corporation. CBPG
has a capital structure consisting of $12 million in bonds that pay a 5% coupon, $5 million in
preferred stock with a par value of $35 per share and an annual dividend of $1.75 per share.
Additionally, the company's common stock has a book value of $6 million with a cost of capital
of 10%. The marginal tax rate for the firm is 33%.
The management wants to acquire additional capital through public debt offering in the amount
of $10 million. The company wants to issue the bonds at par value with a 4% coupon. In order to
analyze the debt offering's impact on the company's cost of capital few calculations has to be
done. We need to calculate the current and new cost of capital and determine the impact of tax
shield.
Current Cost of Capital
To determine the current cost of capital we use the weighted average cost of capital. The
weighted average cost of capital (WACC) is a process of finding the firm's cost of capital by
weighing each category of capital (Seth, 2021). We will include capital sources like common
stock, preferred stock, bonds and other long-term debt. We can find the WACC by multiplying
the cost of capital for each source by its weight, and then we add the products to determine the
total.
We calculate the weighted average cost of equity by dividing the market value of the firm's
equity by total market value (debt and equity) then multiplying this value with the cost of equity
(Seth, 2021). First we calculate the coupon rate on preferred stock which is the annual dividend
per share divided by the par value of share.
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