Business Valuation and Capital Restructuring Finance Coursework

Capital Restructuring and Business Valuation: The Case of Bad Boys Incorporation
Student’s Name
Institutional Affiliation
Capital Restructuring and Business Valuation: The Case of Bad Boys Incorporation
*
The need to earn profits forms the primary basis of every business. Capital is required in the financing of initial operations and the acquisition of capital assets. Financial crises are bound to arise for companies that are already in operation, which might need management and other relevant stakeholders. Typically, ascertaining the value of a business comes in handy owing to the various advantages that it bears. According to Mari and Marra (2018), the worth of a company may be necessary for taxation, establishing partner ownership, or knowing the sale value, among other reasons.
For a better understanding of the concept of business valuation, there is the element of capital restructuring, which is the adjustment that a company makes in its funding plan as a response to the prevailing and changing business condition. The capital structure for Bad Boys Inc., for example, consists of equity, preferred stock, and debt. The case study presents a scenario in which the cost of capital is given by the WACC (weighted average cost of capital). WACC refers to the approach that proportionately weighs the different capital categories that a company uses to finance its assets (Fernandez, 2020).
The WACC is given by; Wd * Rd (1-T) + We *Re + Wp * Rp
Where; Rp is the return on preferred stock, Wp is the weight of preferred stock, Re is the return on equity, We is the weight of equity, T is the tax rate, Rd is the cost of debt, and Wd is the weight of debt.
By extending the above formula to match the available details in the case study for Bad Boys Inc., we have;
WACC = D/V(Rd)(1-t) + E/V(Re) + P/V(Rp), where;
D is the market value of debt
Rd is the return on debt
E is the market value of equity
Re is the return on equity
P is the market value f preferred equity
Rp is the return on preferred equity
According to the formula above, it is essential to note that both preferred and common stocks are non-tax-deductible, while debt is tax-deductible. This explanation implies that the debt burden is deducted from Bad Boys Inc.’s taxable income.
Breaking the above formula into parts for more straightforward understanding, we have;
* Cost of debt
= 45% * 8% * (100 – 35%)
= 0.08 * 0.65
=0.052
=5.2%
* Cost of equity
This is given by E/V(Re)
But, to find Re, we say; P0 = D1/(r-g), where P0 is the price of one share, D1 is the value in dividend for the following year, r denotes retu...