Directions: 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.

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?

Answer: As the instructions are given we have to calculate cost of capital or weighted average cost of
capital (WACC) so the formula for calculating the cost of capita is given below;

𝑊𝐴𝐶𝐶 = 𝑟𝑠 ∗ 𝑊𝑠 + 𝑟𝑑 ∗ 𝑊𝑑 ∗ (1 − 𝑇) + 𝑟𝑝 ∗ 𝑊𝑝

Where;

 rs is cost of equity
 𝑊𝑠 is weight of common stock,
 rd is cost of debt,
 𝑊𝑑 is weight of common stock
 rp is cost of preferred Stock,
 𝑊𝑝 is weight of common stock
 𝑇 is the marginal tax rate

Data and some necessary calculation

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 1.5
 𝑟𝑠 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒
+ 𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 = 20
+ 5% = 12.5. %
 𝑊𝑠 = 50%
 rd = 8%
 𝑊𝑑 = 45%
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑜𝑛 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘 2.5
 𝑟𝑝 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒
= 25 = 10%
 𝑊𝑝 = 5%
 𝑇 = 35%
𝑊𝐴𝐶𝐶 = (0.125) ∗ (0.50) + (0.45) ∗ (0.08) ∗ (1 − 0.35) + (0.10) ∗ (0.05)
𝑊𝐴𝐶𝐶 = 0.0625 + 0.0234 + 0.005
𝑊𝐴𝐶𝐶 = 0.0909 = 9.09%
On average, as the cost of total capital raised through a combination of debt, preferred equity and
common equity, Bad boys pays about 9.09% percent per annum. As the some of the date was not given
directly I have calculated by using some formulas is described above we reached at conclusion
B. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad
Boys cost of capital?

Answer:

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.