Written Assignment Unit 7
Instructions for submission
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.
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)
Superior papers will explain the following elements when responding to the assignment questions:
· 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
Discussion Forum Unit 7
In the discussion forum, you are expected to participate often and engage in deep levels of discourse. Please post your initial response as early as possible and continue to participate throughout the unit. You are required to post an initial response to the question/issue presented in the Forum and then respond to at least 3 of your classmates’ initial posts. You should also respond to anyone who has responded to you.
Your Discussion should be a minimum of 250 words in length and not more than 450 words. Please include a word count. Following the APA standard, use references and in-text citations for the textbook and any other sources.
For this week’s Discussion, provide an answer to the case study questions with a recommendation.
The Exceptional Service Grading Company requires a capital infusion of $500,000. It is currently a closely held corporation with less than 25 shareholders. Although the shareholders are not all related to each other, they all know each other, and they view the business as a family business. The financial statements should be familiar to you because you performed a basic financial analysis of the company in Unit 1 of this course.
Several alternatives are available to the company, consisting of the following:
· Obtain private debt financing
· Seek out a private investor(s) who would be willing to share ownership (private transfer of partial ownership)
· Seek out offers for a private buy-out (private transfer of entire ownership)
· Issue public debt (corporate bonds)
· Issue public common stock (public equity offering)
Briefly discuss each alternative and include implications to the company’s capital structure and cost of capital, if any. Considering the size of the investment ($500,000 infusion), provide a conclusion on how it might impact the financial statement reviewed in Unit 1. No calculations are required.