Guide to the assignment on cost of capital and WACC.
Submit a written paper which is at 2-3 pages in length, exclusive of the reference page. The Abstract is not required or needed. Papers must be double spaced in Times New Roman font (or its equivalent) which is no greater than 12 points in size....
BUS 5111 Financial Management Unit 7 Written Assignment (WA)
Assignment Guide
BUS5111 Unit 7 Written Assignment
Question
Submit a written paper which is at 2-3 pages in length, exclusive of the reference page. The
Abstract is not required or needed. Papers must be double spaced in Times New Roman font
(or its equivalent) which is no greater than 12 points in size. The paper should cite at least three
sources independent of the textbooks.
In this paper, please discuss the following case study. In doing so, explain your approach to the
problem, support your approach with references, and execute your approach. Provide an
answer to the case study’s question with a recommendation.
Case Study:
The Comic Book Publication Group (CBPG) specializes in creating, illustrating, writing, and
printing various publications. It is a small but publicly traded corporation. CBPG currently has a
capital structure 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. The company has
common stock with a book value of $6 million. The cost of capital associated with the common
stock is 10%. The marginal tax rate for the firm is 33%.
The management of the company wishes to acquire additional capital for operations purposes.
The chief executive officer (CEO) and chief financial officer (CFO) agree that another public debt
offering (corporate bonds) in the amount of $10 million would suffice. They believe that due to
favorable interest rates, the company could issue the bonds at par with a 4% coupon.
Before the Board of Directors convenes to discuss the debt Initial Public Offering (IPO), the CFO
wants to provide some data for the board of directors’ meeting notebooks. One point of the
analysis is to evaluate the debt offering’s impact on the company’s cost of capital. To do this:
Solve for the current cost of capital of CBPG on a weighted average basis
Solve for the new cost of capital, assuming the $10 million bond issued at par with a 4%
coupon.
Describe how you approached these calculations. Also discuss the tax shield advantage that
debt capital provides, and briefly explain the cost of capital and WACC
Provide a Table(s) to present answers (Students can transfer their EXCEL Table if utilized)
Summarize findings
Superior papers will explain the following elements when responding to the assignment
questions:
Page 1 of 5
, BUS 5111 Financial Management Unit 7 Written Assignment (WA)
Provide narrative and solve for the current cost of capital of CBPG on a weighted average
basis (WACC)
Provide narrative and solve for the new cost of capital (WACC)
Provide accurate WACC calculations for both scenarios
Provide a Table(s) to present answers (there is a difference between performing
calculations and presenting the supporting data and solved answers)
Provide narrative on tax shield implications for both scenarios
Provide narrative briefly explaining the cost of capital and WACC
Provide a clear, logical conclusion
Basic Concepts to Master
This assignment requires you to demonstrate your understanding of:
The cost of capital and the weighted average cost of capital (WACC).
Suggested Answer Guide
The paper should contain at least the following sections.
Title Page
o To comply with APA style, papers should have a title page.
You may follow this format for student papers:
Page 1
BUS 5111 Unit 7 Written Assignment
Cost of Capital Case Study
Anonymous
University of the People
Page 2 of 5
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