1. Welcome to the Presentation

2. 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

3. 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

4. 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

5. 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

6. Calculation of Coogly’s Cost of Debt
Coupon 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

7. 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

8. 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

9. 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.

10. Thank you