Cost of Capital. Accounting, Finance, SPSS Assignment.

Cost of Capital
Name
Course
Instructor
Date
Cost of CapitalDebt coupon rate of 8%
Preferred stock: $2.50 per share dividend at $25 a share
Common stock: $20.00 a share, Dividend of $1.50 per share and dividends growth rate of 5% per year
Debt
Debt coupon rate of 8%
rd Before-tax cost of debt is 8%
After tax cost of debt is 8%* (1-35%) = 5.2%
Preferred stock
rp= Dividend per share dividend / Price per share $2.5/ $ 25= 0.1= 10%
Common stock
reCost of new common stock (outside equity)
Based on the Gordon Growth Model (GGM)
P= D1/ (r-g)
P= Current stock price
k or r= cost of equity or rate of return
g= constant growth rate
D1= value of next year’s dividends
Thus, $20= $1.50/ (r-5%)
$20*(r-5%) = $1.5020r-1=1.50
20r-1=1.5020r=2.5
Thus, r= 2.5/ 20= 0.125 or 12.5%
* Cost of debt = 5.2%
* Cost of preferred stock = 10%
* Cost of common stock = 12.5%
The weighted average cost of capital (WACC)=wdrd(1−T) +wpsrps + wsrs=
wd is the target weight for debt
wpsis the target weight for preferred equity
ws is the target weight common equity
wd rd (1−T)=45%* 5.2%=2.34%
wpsrps= 5%*10%=0.5%
wsrs= 50%*12.5%=6.25%
WACC= 2.34% +0.5% + 6.25%= 9.09%
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?
WACC =wdrd(...