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). The advantages of using preferred stock in the capital structure include increased financial flexibility through a steady and dependable stream of income, reduced risk due to its preference over common stock holders and tax preferences which can help reduce or eliminate certain taxes. The disadvantages would include the lack of voting rights associated with the stock, no possibility for capital gains due to it being perpetual, as well as restrictions on price increases.

The cost of new equity to the firm is $47.33 ($50 per share – floatation costs divided by last dividend paid + expected growth rate). The advantages of issuing new equity are that it does not interfere with existing management autonomy and control, requires no interest payments or principal repayments from management, potentially provides an influx in cash flow and also allows shareholders to dilute their ownership but still maintain control over 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.

The cost of new debt for Coogly is 6%, which represents 0% (par value) plus 6% coupon rate minus 7% floatation costs. Advantages may include providing a fixed-rate return with relatively low risk since debts must be repaid first before any other claimants get access to assets; potential tax.