bad Boys, Inc. is evaluating its cost of capital calculation, business and finance homework help

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timer Asked: May 26th, 2017
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Question description

Homework Set #4: Chapters 9, 10, & 11

Due Week 8 and worth 100 points

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. Submit your assignment using the assignment link above.

A. Bad Boys, Inc. is evaluating its cost of capital. Under consultation, Bad Boys, Inc. expects to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of Bad Boys, Inc. is currently selling for $20.00 a share. Bad Boys, Inc. expects to pay a dividend of $1.50 per share next year. An equity analyst foresees a growth in dividends at a rate of 5% per year. Bad Boys, Inc. marginal tax rate is 35%. If Bad Boys, Inc. raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is Bad Boys cost of capital?

B. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad Boys cost of capital?

C. On page 457, your textbook details the term Cannibalization. In your own words, identify two corporations that have dealt with cannibalization and what steps were taken to overcome the cannibalization. Please provide any citations and references. Please be articulate in your responses.

Click here to view the grading rubric.

Tutor Answer

Missmourine
School: University of Maryland

Attached.

1
Running Head: MARKET CANNIBILIZATION

Market Cannibalization
Student’s Name
Institutional Affiliation

2
MARKET CANNIBILIZATION

A,
Cost of equity =1.50*(1+0.05)/20
=0.07875
Cost of preference share= 2.50/25
=0.1
Cost of debts =0.08(1-0.35)
=0.052
Weighted averages capital cost =cost of equity*Weight of equity + cost of preference
share*Weight of preference share + cost of debt*Weight of debt.
Weighted average capital cost = (0.07875*0.5) + (0.1*0.05) + (0.052*0.45)
=0.039375+0.005+0.0234
=0.067775
=6.78% (cost of capital)

B,
Weighted averages capital cost =cost of equity*Weight of equity + cost of preference
share*Weight of preference share + cost of debt*Weight of debt.

3
MARKET CANNIBILIZATION

Weighted average capital cost = (0.7875*0.65) + (0.1*0.05) + (0.052*0.3)
=0.0511875+0.005+0.0156
=0.0717875
=7.18%
Cost of capital=7.18%

Market cannibalization.
This is refers to a reduced market share, reduced sales and demand on a product due to
introduction of a new product by the same producer. This is also called corporate
cannibalization. It occurs as the new product does not expand the organization market base as
intended but on the contrar...

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