Fin 534 Homework Chapter 10

HOMEWORK SET #4: CHAPTERS 9, 10, & 11 2DirectionsDirections: 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.Question AA. 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? Weighted average cost of capital (WACC) is a calculation of a firm'scost of capitalin which each category of capitalis proportionately weighted. As mentioned by Brigham and Ehrhardt (2017), all sources of capital, including common stock, preferred stock, bondsand any other long-term debt, are included in a WACC calculation. A firm’s WACC increases as the betaand rate of returnon equityincrease, as an increase in WACC, denotes a decrease in valuationand an increase in risk. A company typically has two sources of finance. Those sources are equity and debt. To calculate WACC, multiply the cost of each capital component by its proportional weight and take the sum of the results. The method for calculating WACC can be expressed in the following formula:WACC = Equity (Weight) + Debt (Weight) * (1 – Td)

Running Head: COST OF CAPITAL-BASICS OF CAPITAL BUDEGETING (CASH FLOWS) – ESTIMATION AND RISK ANALYSIS 2A. 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?The below computation of Cost of equity was done using the dividend growth model WEIGHTAGECOSTTAX RATEAFTER TAX COST New Debt45%8%35%5.20 %Preferred Stock5%10%Non-Tax DeductibleCommon Stock50%12.50%Non-Tax DeductibleCost of Capital =(45% X 5.2%) +(5%X10%)+(50% X 12.50%)=9.09 %B. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common

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