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. the 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, inc.’s cost of capital?

Ans. Bad Boys, Inc.’s cost of capital = 9.09%

Explanation:

hi, we need to find the cost of all the debt instruments of the problem, let´s start by stating that the cost of hte tax-deductable debt is 8% (equals to the coupon rate of the bond).

Preffered Stock

In order to find the cost of the preffered stock, we need to use the following formula.

Cost of Preffered Stock= 10%

Common Stock

To find the cost of the common stocks, we have to use the following formula.

Common Stock Cost = 12.5%

If tax rate is 35%, the cost of capital of Bad Boys, Inc is found by using the following formula.

The cost of capital is =9.09%

Best of luck.

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