Question - A small but publicly traded corporation currently has a capital structure of $50 million in bonds which pay a 5.5% coupon, $20 million in preferred stock with a par value of $50 per share and an annual dividend of $2.75 per share. The company has common stock with a book value of $25 million. The cost of capital associated with the common stock is 12%. The marginal tax rate for the firm is 30%.
The chief financial officer (CFO) suggests that another public debt offering in the amount of $45 million. He believes that because of favorable interest rates, the company could issue the bonds at par with a 4.5% coupon.
Calculate the current cost of capital of Secure and Safe on a weighted average basis
Calculate the cost of capital of the company assuming the $45 million dollar bond issue with a 4.5% coupon is approved.
Discuss how your approached this calculation. Also describe the tax shield advantage debt capital provides.