Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. A. Bad Boys, Inc. is evalua
Running Head: MASTER’S FINANCE ASSIGNMENT
Master's Finance Assignment
Name
Instructor:
Institutional Affiliation
Part A
Weight of debt, w (D) = 45%
Weight of equity, w (D) = 50%
Weight of preferred Shares, w (P) = 5%
Given the formula for WACC as
WACC = r [E] ×w [E] ×w [P] ×r [P] ×r [D] × [1-t] ×w [D]
Where r [E], r[p] and r [D] are the cost of equity, preferred stock and cost of debt. w [P], w [E], and w [D] are the weight of equity, preferred stock and debt, and t=the tax rate.
The debt will be the yield to maturity of the bond, calculated as follows;
Note: bond is issued at par, hence its yield to maturity will be equal to its coupon rate
Cost of debt = YTM= Coupon rate = 8%
For cost preferred stock;
Annual Dividend of preferred stock = $2.5
Current price = $25
Cost of preferred stock = dividend/ current price
Cost of preferred stock =D18/D19 = 2.5/25 =10%
Cost of equity;
Applying the dividend growth model, cost of equity calculated using the following expression
Given,
Current dividend = $1.5
Price = $20
Growth rate = 5%
Floatation = 0%
Applying to the formula,
= 12.88%
Tax rate, t = 35%
But,
WACC = r [E] ×w [E] + w [P] ×r [P] + r [D] × [1-t] ×w [D]
= 12.88 × 0.5 + 0.05 × 10 + 8 × [1-0.35] × 0.45
= 9.28%
Part B
Provided w (D) = 30%, w (E) = 65%, and w (P) = 5%.
From the equation above,
WACC = r [E] ×w [E] + w [P] ×r [P] + r [D] × [1-t] ×w [D]
Cost of debt = YTM = Coupon Rate = 8%
Cost of preferred stock is calculated as follows;
Annual Dividend of preferred stock = $2.50
Current price = $25
Cost of preferred stock = Dividend/current price
= 2.50/25
= 10%
Cost of equity is calculated as follows using dividend growth model;
Given that current dividend = $1.5, price = $20, Growth rate = 5% and Floatation = 0%. Substituting these values in the model equation, we have;
= 12.88%
Given the tax rate = 35%
WACC = r [E] ×w [E] + w [P] ×r [P] + r [D] × [1-t] ×w [D]
WACC = 30%*5.20%+5%*10%+65%*12.88%
=10.43%
Part C
When the sales of a particular product decreases as a result of a newly launched product from the same company is known as cannibalization. The companies selected are the Samsung and Proctor and Gamble.
Samsung Company’s Products
The Samsung Galaxy Note and the Samsung Galaxy S series
The two products carry some similar traits and the chances that an individual who uses the Samsung Galaxy Note will buy S series, like Samsung Galaxy s3, are so minimal. And now with the rumors that an introduction of Samsung Galaxy Mega is being introduced into the market, cannibalization is prone to happen. It will be interesting to see how the three prime products will compete with each other in the market.
One of the best way to ensure good cannibalization is to make sure there exist a strong brand loyalty to the original product. The consumers who were loyal to company’s initial product are more likely to purchase the new products introduced by the same organization. Thus, a unique selling position is created that compares to the old product. (Vincent, 2013).
Proctor and Gamble.
Gillette is a brand that utilizes reputations of their existing brand to gain leverage of a successful cannibalization campaign.
Gillette are currently making two line of razors, known as the Mach 3 and Fusion ProGlide. When the Fusion ProGlide product was introduced in the market industry, the marketing team of the company did not go to advertise it to the new consumers. Instead, they focused in old consumers by advising them to switch to the new products. The move was the best and made the Gillette the bestselling brand of razors across the world. The new product, Fusion ProGlide, was sold at 40% more expensive than the older ones in 2006 when it was launched. In 2008, two years later, the brand achieved billion dollar selling, making it the fastest brand in P&G history to attain such milestone. Currently, the Fusion ProGlide products are still the best selling razors in the world and portrays that cannibalization, when applied correctly, can yield huge profits. (Vincent, 2013).
ReferencesVincent, N. (2013, Aprill ). When to Cannibalize Your Existing Products. MCNG Marketing, 1-2.
