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%.
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?
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?
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?
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?
Title: Coogly Company's Weighted Average Cost of Capital
Slide 1: Introduction
- Welcome to the presentation on Coogly Company's weighted average cost of capital (WACC)
- Going to explore the various components of WACC and their impact on the firm's cost of capital
Slide 2: Component Cost for Preferred Stock
- Coogly has preferred stock paying a dividend of $4 per share
- the stock sells for $82 per share with a flotation cost of $6 per share
- Formula: Preferred Stock Cost = Dividend / Stock Price + Flotation Cost
- Calculate the component cost for Coogly's preferred stock
Slide 3: Advantages and Disadvantages of Preferred Stock
- Advantages of Preferred Stock:
- No voting rights for shareholders
- Stable dividend payments
- Tax advantage for the company (dividend payments are not tax-deductible)
- Disadvantages of Preferred Stock:
- Higher cost compared to debt
- Fixed dividend payments regardless of company's performance
Slide 4: Cost of New Equity
- Coogly plans to issue new common stock
- Stock selling for $50 per share with a flotation cost of $9 per share
- Last dividend paid was $3.80 per share, expected to grow at a rate of 7%
- Formula: New Equity Cost = (Dividend / Stock Price) + Growth Rate + Flotation Cost
- Calculate the cost of new equity to the firm
Slide 5: Advantages and Disadvantages of New Equity
- Advantages of New Equity:
- No interest payments
- No fixed dividend obligations
- Provides funds for growth opportunities
- Disadvantages of New Equity:
- Dilution of ownership
- Costly due to flotation costs
Slide 6: Cost of New Debt
- Coogly will use new bonds for capital projects
- Bonds with market and par value of $1000, coupon rate of 6%, flotation cost of 7%
- Bonds will mature in 20 years
- Formula: New Debt Cost = Coupon Rate x (1 - Tax Rate) + Flotation Cost
- Calculate the cost of new debt for Coogly
Slide 7: Advantages and Disadvantages of New Debt
- Advantages of New Debt:
- Lower cost compared to equity
- Interest payments are tax-deductible
- Disadvantages of New Debt:
- Increases financial risk
- Requires regular interest payments
Slide 8: Weighted Average Cost of Capital (WACC) Calculation
- Coogly's capital structure: 10% preferred stock, 30% debt, and 60% new common stock
- WACC = (Preferred Stock Weight x Cost) + (New Equity Weight x Cost) + (Debt Weight x Cost)
- Calculate the weighted average cost of capital for Coogly
Slide 9: Advantages and Disadvantages of WACC
- Advantages of WACC:
- Incorporates all sources of funding
- Reflects the cost of capital for an entire firm
- Useful for evaluating investment opportunities
- Disadvantages of WACC:
- Based on assumptions and estimates
- Ignores risk variations for different projects
Slide 10: Recommendation
- Present the final recommendation based on the calculated WACC for Coogly
- Consider the advantages and disadvantages, as well as the specific needs and goals of the company
Summary Slide: Key Takeaways
- Recap the important points discussed in the presentation
- Emphasize the significance of understanding and utilizing WACC in financial decision-making
Reference Slide: Sources
- List any sources or references used in preparing the presentation
Note: The content in the notes section should provide further explanation and details for each slide, clarifying the calculations and offering additional insights.
Title: Coogly Company: Weighted Average Cost of Capital Analysis
Slide 1: Introduction
- Introduce the concept of weighted average cost of capital (WACC)
- Mention that WACC is a key financial metric used to evaluate the cost of funds for a company
Slide 2: Capital Structure
- Provide the breakdown of Coogly's capital structure
- Mention that it consists of 10% preferred stock, 30% debt, and 60% new common stock
- Highlight that no retained earnings are available
Slide 3: Preferred Stock Cost Component
- Explain the cost component of preferred stock
- Calculate the component cost for Coogly's preferred stock
- Preferred stock dividend = $4 per share
- Preferred stock price = $82 per share
- Floatation cost = $6 per share
- Mention that the cost of preferred stock is the dividend divided by the price minus floatation cost
- Discuss the advantages and disadvantages of using preferred stock in the capital structure
Slide 4: New Common Stock Cost Component
- Explain the cost component of new common stock
- Calculate the cost of new equity to the firm
- Last dividend paid = $3.80
- Dividend growth rate = 7%
- New common stock price = $50 per share
- Floatation cost = $9 per share
- Discuss the advantages and disadvantages of issuing new equity in the capital structure
Slide 5: New Debt Cost Component
- Explain the cost component of new debt
- Calculate the cost of new debt for Coogly
- Bond market and par value = $1000
- Coupon rate = 6%
- Floatation cost = 7%
- Time to maturity = 20 years
- Discuss the advantages and disadvantages of issuing new debt in the capital structure
Slide 6: Weighted Average Cost of Capital Calculation
- Explain the calculation of weighted average cost of capital (WACC)
- Show how to compute the weights for each capital component
- Apply the cost components calculated earlier to find the weighted average cost of capital for Coogly
Slide 7: WACC Advantages
- Discuss the advantages of utilizing WACC methodology in capital budgeting
- Provides a benchmark rate to evaluate investment opportunities
- Reflects the cost of funds from various sources
- Helps in decision-making and capital allocation
Slide 8: WACC Disadvantages
- Discuss the disadvantages of using WACC methodology in capital budgeting
- Assumptions may not accurately represent market conditions
- WACC disregards project-specific risks
- Sensitive to changes in capital structure and market rates
Slide 9: Graph/Chart
- Display a graph or chart representing the capital structure and component costs
- Use visual aids to enhance understanding and clarity
Slide 10: Conclusion and Recommendation
- Summarize the findings and key points of the presentation
- Provide a final recommendation to Coogly based on the calculated WACC
- Highlight the importance of periodically reassessing and adjusting the capital structure and WACC
Note: In the Notes section of each slide, provide detailed explanations and calculations to support the information presented on the slide.