A. Bad Boys, Inc. is evaluating its cost of capital. Under consultation, Bad Boy

Question

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?

Explanation / Answer

cost of capital = 9.09%

Amount weight cost weight*cost equity 50 0.5000 12.50% 0.0625 debt 45 0.4500 5.20% 0.0234 preferred stock 5 0.0500 10.00% 0.0050

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