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?

Answers

Answer 1

Answer:

Answer:

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.

$Cost P.Stock =(Dividend)/(Price) =(2.5)/(25)=0.1$

Cost of Preffered Stock= 10%

Common Stock

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

$CommonStock=(Div1+Price*GrowthRate)/(Price)$

$CommonStock=(1.5+20*0.05)/(20) =0.125$

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.

$CostCapital=Bond(CostBond)(1-T)+P.Stock(costP.Stock)+C.Stock(Cost.C.Stock)$

$CostCapital=0.45(0.08)(1-0.35)+0.05(0.1)+0.5(0.125)=0.0909$

The cost of capital is =9.09%

Best of luck.

Answer 2

Answer:

Final answer:

The cost of capital for Bad Boys, Inc., considering their mixed financing strategy and marginal tax rate, is calculated to be approximately 9.09%. The calculation considers the costs of debt, preferred stock, and common equity, all weighted according to their proportion in the capital structure.

Explanation:

To calculate Bad Boys, Inc.’s cost of capital, we must compute the costs of debt, preferred stock, and common stock, then weight them according to their proportions in the firm's capital structure. The cost of debt (interest rate) is 8%, but because interest expense is tax deductible, we multiply this by 1 minus the tax rate: 8% * (1 - 35%) = 5.2%. The cost of preferred stock (dividend rate) is the dividend divided by the price per share: $2.50 / $25 = 10%. For common stock, we use the Gordon Growth Model to find the cost of equity: (next year’s dividend / current stock price) + growth rate of dividends: ($1.50 / $20) + 5% = 12.5%.

Now, we must weight these costs according to the proportions of capital: 5.2% * 45% (debt) + 10% * 5% (preferred stock) + 12.5% * 50% (common equity) = 2.34% + 0.5% + 6.25% = 9.09%. Thus, Bad Boys, Inc.'s cost of capital is estimated to be 9.09%. Understanding this concept allows companies to make informed decisions about future investments and financial management practices.

Learn more about Cost of Capital here:

brainly.com/question/34768730

#SPJ3

Related Questions

On December 31, Year 3 Snack, Inc. adjusted its records to recognize $5,000 of accrued salaries. Based on this information alone. A.the balance sheet at the beginning of Year 4 would show $5,000 of accrued salaries expense. B.the balance sheet at the beginning of Year 4 would show $5,000 of accrued salaries payable.C.the income statement for Year 3 would show $5,000 of accrued salaries payable. D.the income statement for Year 4 would show $5,000 of accrued salaries expense.
Peak Performance Sporting Goods Company continues to perform well. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = $.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period =
Find the duration of a 6% coupon bond making annual coupon payments if it has four years to maturity and a yield to maturity of 5%. (assuming a face value of $1,000)
An asset used in a four-year project falls in the five-year MACRS class for tax purposes The asset has an acquisition cost of $5,100,000 and will be sold for $1,600,000 at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7 (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Dimitry formats his memo so the four heading elements are positioned to the left of the page. This is an example of the design principle of_________-

Aragon Company has just received the August 21, 2010 bank statement, which is summarized below. County National Bank Disbursements Receipts Balance

Balance, August 1 $9,369

Deposits during August $32,200 41,569

Note Collected for depositor, including $40 interest 1,040 42,609

Checks cleared during August $34,500 8,109

Bank Service Charges 20 8,089

Balance, August 31 8,089

The general ledger Cash account contained the following entries for the month of August.

Cash

Balance, August 1 10,050 Disbursements for August 35,403

Receipts during August 35,000

Deposits in transit at August 31 are $3,800, and checks outstanding at August 31 total $1,550. Cash on hand at August 31 is $310. The bookkeeper improperly entered one check in the books at $146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.

Instrustions:

a. Preare a bank reconciliation dated August 31, 2010, proceeding to a correct balance.

b. Prepare any entries necessary to make the books correct and complete.

c. What amount of chas should be reported in the August 31 balance sheet?

Answers

a. The preparation of the bank reconciliation is shown below.

b. The entries are given below.

c. The amount of cash should be $10,649.

Preparation, journal entries:

a. The preparation of the bank reconciliation is presented below.

Bank balance as per bank statement $8,089

Add: cash on hand $310

Add: deposit in transit $3.800

Less: outstanding checks $1,550

Adjusted balance $10,649

Balance as per cash book ($10,050 + $35,000 - $35,403) $9,647

Less: correction ($164.5 - $146.5) $18

Less: bank service charge $20

Add: note collected $1,040

Adjusted balance $10,649

b. The journal entries:

Cash $1,040

Note receivable $1000

Interest receivable $40

(Being collection od note & interest)

Bank charges $20

cash $20

(being bank charges are recorded)

Supplies expense $18

cash $18

(Being error in recording check)

c. The amount of cash should be $10,649.

Learn more about journal entry here: brainly.com/question/24345471

Answer:

Complete solution in tabular form is given below for better understanding and demonstration.

Consider the following activities that take place in a veterinary clinic.(a) Cleaning cages.
(b) Heating and air conditioning the clinic.
(c) Sending blood work to a lab.
(d) Dispensing medicine.
Which of the following statements is true?
A. Heating and air conditioning the clinic is a facility level activity.
B. Dispensing medicine is a facility level activity.
C. Cleaning cages is a facility level activity.
D. Sending blood work to a lab is a facility level activity.
E. Service entities cannot use ABC for overhead allocation.

Answers

Answer:

E. Service entities cannot use ABC for overhead allocation.

Explanation:

ABC costing is limited to use when the cost can be directly traced to a certain activity. All of the Activities are volume driven and overheads would be incurred in small proportion to the overall cost.

Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive, and explain your answers.Wooden no. 2 pencilsCopper (hint: there are many sellers)Local public utilities (ex. water, electricity)Peanut butterLipstick

Answers

Answer:

a)no. 2 wooden pencils - perfectly competitive market

b) copper - perfectly competitive market

c) Local public utilities- monopoly market

d) Peanut butter - monopolistic competitive market

e) Lipstick - monopolistic market

All no 2 pencils are identical each other. There are many sellers of pencils. And there's usually a general price for the pencils. Also, there are little barriers to entry or exit of firms. So the market for the no 2 pencils are perfectly competitive firms.

Also, coppers are identical to each other. They can't be differentiated from each other. There is usually a standard price for copper. So the market for copper is perfectly competitive.

For local public utilities, there is usually one firm providing the service. Also, because of the high cost of setting up these services, there is a high barrier to the entry of firms into the industry. This is why local public utilities are a monopoly.

Peanut butter and lipsticks are perfectly monopolistic firms because:

A. There are many firms selling this product but the products are usually differentiated.

B. Also, firms sets the price for their products

Explanation:

A perfect competition is characterised by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.

In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.

A monopolistic competition is when there are many firms selling differentiated goods. The demand curve is downward sloping

A monopoly is when there is only one firm operating in the industry. There are high barriers to entry and exit of firms in the industry.

I hope my answer helps you

Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now?a) 4.43 b) 3.25 c) 10.75 d) 6.33

Answers

Answer:

d) 6.33

Explanation:

The computation of the expected dividend a year from now is shown below:

As we know that

Price of the stock = Expected dividend ÷ (Required rate of return - growth rate)

Expected dividend = Price of the stock × (Required rate of return - growth rate)

= $63.25 × (0.17 – 0.07)

= $6.325

hence, the correct option is d. $6.33

We simply applied the above formula so that the correct value could come

And, the same is to be considered

Of the following, what actions would be most helpful as Andrew develops his own brand? Check all that apply. Emphasis his degree and G.P.A. Talk about his three summer internshipsEmphasize his leadership position in an on-campus organization Include information on classes he took List referrals

Answers

Answer:

The correct answers are letters "B" and "C": Talk about his three summer internships; Emphasize his leadership position in an on-campus organization.

Explanation:

Employers tend to look for relevant information on resumes. Usually, applicants that go further in selection processes are those whose resumes highlighted outstanding, unique information that shows the applicants have skills not easy no find for recruiters.

Thus, Andrew should include his core competencies on his resume but pointing out capabilities that employees might be interested in such as leadership and teamwork. In case he has remarkable experiences such as cultural exchanges or internships, they must be added to his curriculum vitae as well.

Final answer:

When developing his brand, Andrew should emphasize his three summer internships, and his leadership role in an on-campus organization, and include referrals. These factors demonstrate practical experience, leadership skills, and personal recommendations which are highly valued by potential employers.

Explanation:

As Andrew works on developing his brand, all the options presented should be utilized to a certain extent as they each provide valuable information about his experiences and qualifications. However, some aspects may carry more weight than others. Firstly, mentioning his three summer internships, where he gained practical experience, will go a long way. Employers value hands-on experience since it shows a candidate's initiative to learn and thrive in a real-world environment.

Secondly, his leadership position in an on-campus organization should be highlighted. Leadership roles demonstrate skills such as teamwork, management, and the ability to overcome challenges, which are valuable in any job role.

Lastly, providing referrals or recommendations can be another great asset. Referrals act as testimonials of his abilities, work ethic, and accomplishments.

His GPA and the classes he took might be less influential, depending on the specific job or industry he is interested in.

Learn more about it here:

brainly.com/question/33555303

#SPJ11

Part Three: Neighboring WSU dropped their tuition and fees by 14 percent and TTA saw enrollment fall from 8,400 to 7,400. What is the cross elasticity between the two schools.?