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APA
Subject:
Accounting, Finance, SPSS
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Case Study
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English (U.S.)
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Case Study on Capital Cost

Case Study Instructions:

Directions: Answer the following questions in 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.




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?




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?

Case Study Sample Content Preview:
SPSS Case Study Paper on Capital Cost

Cost of capital
Student’s Name:
Institutional Affiliation:
The Cost of capital

In simple terms, it is the cost that an organization uses in funding its operations. The cost can be categorized as debt and equity.
Marginal tax rate 35%
Coupon rate of 8%
rd= 0.08(1-0.35)
rd = 0.52 (cost of debt)
The cost of debt is multiplied by (1- tax rate). The reason for this is that interest rate expense is allowed as a deduction when calculating taxes. Tax deductibility generates a saving that must be accounted for (Frank, M. Z., & Shen, T. 2016.
The Cost of preferred stock (rp) = preferred dividend per share/current stock price
rp = $2.50 / $25 = 10%
The Cost of Common Stock (re) =
re = $1.50 / $20 + 5 percent =
7.5 percent + 5 percent = 12.5%
If Bad Boys Inc. raises capital using a de...
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