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5111 Written Assignment Unit 7

The document analyzes the current and new weighted average cost of capital (WACC) for the Comic Book Publication Group (CBPG). It calculates CBPG's current WACC at 5.44% based on its capital structure. It then calculates a new WACC of 4.61% based on CBPG issuing a $10 million bond at 4%. Issuing the new debt reduced CBPG's overall cost of capital, benefiting the company through the tax shield advantage of debt financing.

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Rachell Ann Uson
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489 views6 pages

5111 Written Assignment Unit 7

The document analyzes the current and new weighted average cost of capital (WACC) for the Comic Book Publication Group (CBPG). It calculates CBPG's current WACC at 5.44% based on its capital structure. It then calculates a new WACC of 4.61% based on CBPG issuing a $10 million bond at 4%. Issuing the new debt reduced CBPG's overall cost of capital, benefiting the company through the tax shield advantage of debt financing.

Uploaded by

Rachell Ann Uson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Case Study for a The Comic Book Publication Group (CBPG)

University Of The People

Written Assignment

Bus 5111 Financial Management, Unit 7

3/17/2021
2

Case Study for a The Comic Book Publication Group (CBPG)

In this paper we will analyze and calculate the values of the current cost of capital of the

Comic Book Publication Group CBPG on a weighted average basis, and the new cost of capital,

if in case the $10 million bond issued at par with a 4% coupon. Then we would provide a

description of how the values were calculated. Later, a discussion of tax shield advantage debt

that capital provides will be given and later a brief explanation of the cost of capital and WACC

will be given as well. We would also include Tables of values all required answers calculations.

Narrative for Cost of capital

The cost of compensation required to finance a budget project, such as setting up new firms.

When investors and analysts negotiate monetary costs, they state the estimated cost of a

company's debt and equity costs together. Expenditure costs incurred by businesses to evaluate

major projects and their use of resources by investors to evaluate investment should be risky

compared to the return (Kenton, 2021).

Cost of capital is calculated by using the weighted average cost of capital formula which

reflects the cost of both debt and equity capital (Kenton, 2021).

Narrative for The weighted average cost of capital (WACC)

WACC is the metric used to calculate the company’s cost of capital in every category and

is weighted accordingly (Hargrave, 2021). The wighets which are assigned are the ratios of debt-

to-equity to the total capital (Hargrave, 2021). Its calculated using the formula (Hargrave, 2021):
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Calculation of WACC for Current Capital Structure.

Current Capital Structure


amount Weight in total capital
5%Bonds 12,000,000 52.17%
Preferred Stock 5,000,000 21.74%
Common Stock 6,000,000 26.09%
Total 23,000,000 100%

5% bond’s cost of capital= Interest rate* tax shield


=5%*(1-0.33)
=5%*0.67
=3.35%

Preferred Stock’s cost of capital= dividend per share/par value per share (corporate finance)

=1.75/$35=5%

Common stock’s cost of capital = 10%

Cost of capital Weight in total capital Weighted average cost


of capital (WACC)
5% bonds 3.35% 52.17% 1.75%
Preferred stock 5.00% 21.74% 1.09%
Common stock 10% 26.09% 2.61%
Total 100% 5.44%
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Current WACC is 5.44%

The WACC for the current structure is 5.44%

Calculation of WACC for New Capital Structure.

New Capital Structure


Amount Weight in total capital
5% bonds 12,000,000 36.36%
Preferred stock 5,000,000 15.15%
Common stock 6,000,000 18.18%
4%bonds 10,000,000 30.30%
total 33,000,000 100%

4% bonds of capital =interest rate*tax shield = 4% *(1-0.33) = 2.68

Revised capital structure


Amount Weight in total capital
5% bonds $12,000,000 36.36%
Preferred stock $5,000,000 15.15%
Common stock $6,000,000 18,18%
4% bonds $10,000,000 30.30%
Total $33,000,000 100.00%

Using the New weighted average cost of capital formula (Kenton, 2021)

New WACC = ((E1 / V) x Re1) + (E2 / V) x Re2) + ((D1 / V) x Rd1) x (1-T)) +((D2 / V) x Rd2) x

(1-T))

= (5,000,000 / 33,000,000 x 5) + (6,000,000 / 33,000,000 x 10) + ((12,000,000 /

33,000,000 x 5 x (1 - .33)) + ((10,000,000 / 33,000,000 x 4 x (1 - .33)) = .76 + 1.82

+ 1.22 + .81

= 4.61%
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The WACC for the New Capital Structure is 4.61%.

Tax Shield Implications

In the current capital stricture the Preferred stock dividend is not tax deductible, whereas

even in the new capital structure, the Preferred stock dividend is not tax deductible.

Summary and Conclusion

The weighted average cost of Capital was reduced from 5.44% to 4.61% , thus the

company benefitted when it issued the new debt capital. This was in turn connected with the

overall lower cost of capital to 2.68%. In the first case, the funding is of $.0544 per 1$ while the

second case the funding is of $.0461 per 1$, which is the average rate of interest of payments to

shareholders, CBPG is preferred to pay low and low tax shield. There we good assumptions

made by the CEO and CFO of the company and hence the company would also consider

presenting the new public debt offer.


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References

Hargrave, M. (2021, March 12). How to Calculate the Weighted Average Cost of Capital
– WACC. Investopedia. https://www.investopedia.com/terms/w/wacc.asp.

Kenton, W. (2021, March 4). Cost of Capital. Investopedia.


https://www.investopedia.com/terms/c/costofcapital.asp.

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