Description
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
Explanation & Answer
Here is the final answer. Thanks
(a) Cost of Capital Under 50% Equity, 5% Preferred Stock, and 45% Debt
Calculation of Cost of Equity
Expected Dividend
$
1.50
Current Stock Price
$ 20.00
Dividend Growth Rate
5.00%
Cost of Equity
12.500%
Calculation of Cost of Debt
Coupon Rate
8.00%
Pre-Tax Cost of Debt
8.00%
Calculation of Cost of Preferred Stock
Preferred Dividend
$
2.50
Market Price of Share
$
25.00
Cost of Preferred Stock
10.00%
Calculation of Weighted Average Cost of Capital (WACC)
Tax
After Tax
Weighted
Sources
Weight
Cost
Rate
Fund
Average Cost
Common Stock
50.00%
12.50%
6.25%
Preferred Stock
5.00%
10.00%
0.50%
Debt
45.00%
8.00%
35.00%
5.20%
3.60%
WACC
10.35%
(b) Cost of Capital Under 65% Equity, 5% Preferred Stock, and 30% Debt
Calculation of Weighted Average Cost of C...
Review
Review
24/7 Homework Help
Stuck on a homework question? Our verified tutors can answer all questions, from basic math to advanced rocket science!
Similar Content
Related Tags
12 Rules for Life
by Jordan Peterson
The Kite Runner
by Khaled Hosseini
Crippled America
by Donald J Trump
The Jade Peony
by Wayson Choy
Sharp Objects
by Gillian Flynn
50 Shades of Grey
by E. L. James
The Picture of Dorian Gray
by Oscar Wilde
Their Eyes Were Watching God
by Zora Neale Hurston
How to Win Friends and Influence People
by Dale Carnegie