This essay focuses on the company faces liquidation.. is evaluating its cost of capital. Under consultation, Bad Boys, Inc. expects to issue new debt at par with a coupon rate
Cost of Capital Instructions Answer the following questions. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Please respond to the following: 1. 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? 2. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad Boys, Inc.’s cost of capital? shareholder has a claim on assets of a company it has stock in. However, the claims on assets are relevant only when the company faces liquidation.
In that event, all of the company’s assets and liabilities are counted, and after all creditors are paid, the shareholders can claim what is left. This is the reason that equity (stocks) investments are considered higher risk than debt (credit, loans, and bonds) because creditors are paid before equity holders, and if there are no assets left after the debt is paid, the equity holders may receive nothing.