Question

Part of Glo's strategic plan is to capture market segments that are traditionally underserved. Glo's management believes that the market for men's care products is underserved and would be an excellent fit. Glo has already reached out to the male partner of the social media influencer, and he has agreed to be part of the branding campaign for men's products. However, this will require a significant marketing investment up front $250,000 before the first product is even introduced to the market and $45,000 per year after that

Glo's marginal tax rate is 20%.

Glo has already been running at maximum capacity for several months, and is looking to expand its production facility at a cost of $4 million in order to introduce the new product line, as well as to increase production of existing offerings.

Glo currently has an unsecured bank loan of $2.5 million and a before-tax interest rate of 9%. There are $6 million in common shares outstanding with an 18% cost of equity. The market value for debt and equity components is equal to the above values

Glo has determined two viable options for raising the $4 million in capital necessary to fund the new production facility:

bank loan (7% before-tax)

preferred shares (12%)

The bank loan would require Glo to use the building as security and maintain a minimum working capital ratio.

Calculate Glo's weighted average cost of capital under each funding alternative based on the information provided above. Identify the funding alternative with the lowest cost of capital and discuss any qualitative considerations related to each option.