Question

Asked Nov 22, 2019

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Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%.

- If Global raises capital using 45% debt, 5% preferred stock, and 50% common stock what is their cost of capital? [Note: you are supposed to show every step of your calculation and interpret the result.]
- If Global raises capital using 30% debt, 5% preferred stock, and 65% common stock what is their cost of capital? [Note: you are supposed to show every step of your calculation and interpret the result.]
- Evaluate the two finance options and identify which one they should choose? Assess the advantages and disadvantages of your choice?

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Step 1

Part a & b:

**Calculation of Cost of Capital:**

a. The cost of capital is __9.09%__.

b. The cost of capital is __10.19%__.

**Excel Spreadsheet:**

Step 2

**Excel Workings:**

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