Case Study:

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\mathrm{.}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$)$

Summarize findings

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