What's the Difference Between Preferred Stock and Common Stock?

Part A 

New debt is 45%, its cost is 8%, the tax rate is 35% and the after tax is 5.20%. Preferred stock and common stock are non-tax deductible. The cost of preferred stock and common stock are 10% and 12.5% respectively. The cost of capital is thus 

(45*5.2%) + (5%*10%)+(50%*12.50%) = 9.09% 

Part B 

First, we assume that the cost of each factor remains constant. Thus, cost of capital is equivalent to = (30%*5.2%) + (5%*10%) + (65%*12.50) = 10.9% 

Part C 

Market cannibalization is the negative effect that new products have on related or existing products. The case can happen even if the sale of the new product is increasing as long as sale and demand for existing and related products are affected. Gassmann, et al. (2015) defines cannibalization as the reduction of product sale due to the release of a new one in the market. 

Apple is one company that faced cannibalization. Importantly, the company introduces new products in the market often. The company deals with cannibalization by putting customers in a dilemma when deciding whether to buy iMac, MacBook, iPad, or an iPhone. The company uses design as the main distinctive aspect of each device. Thus, all products have been the best in its own make and measure. Apple’s head of marketing Schiller says that “iPhones have been great that customer don’t have reasons for buying iPad while iPads have been made great that you don’t know why you need a notebook. Similarly, notebooks are great that you may not need a desktop (Heath, 2015). Thus, all products compete with each other. 

Honda is another company that experiences cannibalization. One example is the introduction of HR-V subcompact SUV that is taller than the Honda Fit Compact and Smaller than crossover CR-V (Tuttle, 2015). During the first few weeks of its introduction, 6381 of the model were sold, a number triple to other models. The company deals with cannibalization by obtaining as many loyal customers as possible. In as much as the company made high sales of the new model, the total sales of CR-V were equally strong during the same year. According to Tuttle (2015), the high sales of new the product originated from new customers. 

References 

Gassmann, O., Frankenberger, K., Csik, M., Sauer, R., & Lee, J. Y. (2015). Holcim: Paving the Way Towards Radically New Business Models. 

Heath, A. (2015). Apple explains its brutal survival-of-the-fittest approach to selling computers. Business Insider. 

Tuttle, B. (2015). Honda’s Adorable Little SUV Is This Summer’s Hottest New Car. Money.