What are the advantages and disadvantages of using preferred stock in the capital structure?

The component cost for Coogly’s preferred stock is $78 per share ($82 per share – $4 dividend). Preferential stock is a better option than common stock because it offers greater financial flexibility and lower risk. It also has fewer shareholders and can be used to reduce or eliminate taxes. There are no voting rights, limited capital gains, and restrictions on price rises.

The cost of new equity to the firm is $47.33 ($50 per share – floatation costs divided by last dividend paid + expected growth rate). New equity is not a disruptive tool for management. It does not require interest repayments or principal payments from the management. Additionally, it can potentially provide an increase in cash flow. Shareholders have the option to dilute their shares while still maintaining control of company assets. Disadvantages may include additional costs involved with offering securities such as listing fees & underwriting discounts; dilution of earnings per share due to more shares issued; potential shareholder pressure resulting from perception that stocks are being watered down; and possibly causing higher levels of current taxation due to high profitability among others.

Coogly’s new debt costs are 6%. This is equal to 0% par value plus 6% coupon and 7% floating fees. There are potential benefits, such as a fixed rate return and low risk. All debts must first be paid before other claimants can access assets.