Welcome to the Presentation

Calculation of Coogly’s Cost of Preferred Stock Preferred Dividend Pd= $4 Preferred Stock Price P=$82 Flotation Cost Pf= $6 Cost of Preferred Stock Kp= Pd/(P- Pf) = 4/(82-6) =.0526 or 5.26% As flotation cost increases cost. So, issue price will be reduced by the amount of flotation cost to reflect the increased cost in the cost of preferred stock

Advantage and Disadvantage of preferred Stock It is risk less leverage advantage. Holders cannot force for insolvency if dividend is not paid There is no anxiety of repayment as there is no fixed repayment date Holders also get preference at the time of payment in case of liquidation Holder have no voting right. So, they cannot exert power Disadvantage: It is costly as dividend price is higher than equity It is difficult to sell as investors does not like to buy it Investors get priority claim in assets and profits It is a must to pay dividends Advantages are more significant than disadvantages. So, the issuance is better for a company

Calculation of Coogly’s Cost of Common Stock Common Dividend Cd= $3.8 Common Stock Price P=$50 Flotation Cost Cf= $9 Growth rate of dividend g= .07 Cost of Common Stock Kc= (Cd/(P- Cf))+g = (3.8/(50-9))+.07 =.1627 or 16.27% Here also flotation cost is deducted from price to reflect the increased cost. Moreover perpetual growth rate is added to it to reflect the growing dividend in the cost

Advantage and Disadvantage of New Common Stock As dividend is not fixed, it creates no new fixed payments initially It has no payment date so there is no obligation to pay Issuing new equity proves creditworthiness of the company to the lenders Disadvantage Issuing new equity share dilutes power of existing shareholders Equity value per share reduces as number of share increases Cost of issuing security is higher than other securities that creates huge one time cost for a company

Calculation of Coogly’s Cost of Debt Coupon D @ 6%= $60 Bond Price P=$1000 Flotation Cost Df= 7% or .07 Tax rate t = 40% or .4 After tax Cost of Debt Kd= (D/(P-(1-Df))* (1-t) = (60/(1000-(1-.07))* (1-.4) =.0387 or 3.87% As debt is tax deductible, tax amount is deducted from the percentage of cost of debt and flotation cost is reduced to reflect increased cost

Advantage and Disadvantage of New Debt New debt issuance gives tax shield to the company It gives signal that the company is expanding Issuing new debt does not dilute ownership of the existing Disadvantage Issuing new debt increases risk of the company Timely coupon payment is a must, increases cost of the company If asset is kept as collateral if coupon is not paid, assets can be sold for payment due to increase in debt level

Calculation of Coogly’s WACC Cost of Preferred Stock Kp= .0526 Weight of Preferred Stock Wp= .1 Cost of Common Stock KC=.1627 Weight of Common Stock Wc=.4 After tax Cost of Debt Kd=.0387 Weight of Debt Wd= .3 WACC = Kp* Wp+ KC*Wc+ Kd* Wd =(.0526*.1)+(.1627*.4)+(.0387*.3) = .082 or 8.2% As Coogley has no retained earning cost of retained earnings is not included here. Moreover it can be seen equity has highest cost and debt has lowest cost as debt holders have limited right up to loan amount on the company

Advantage and disadvantage of WACC in Capital Budgeting Process WACC is more appropriate to discount at present value because use of only cost of equity overstates cost where as only use of cost of debt understates cost WACC gives appropriate discounted price It helps to determine economic flexibility and expansionary opportunities and merger options Disadvantage: WACC calculation is much complex than it actually seems Though WACC is calculated following single way, interpretation can vary person to person and thus create problem in the company If market beta increases WACC also increases and thus creates high risk.

Thank you