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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%.
Problem 1: Solve for the current cost of capital of CBPG on a weighted average basis
Problem 2: Solve for the new cost of capital, assuming the $10 million bond issued at par with a 4% coupon.
Problem 3: 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
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