Calculating the Cost of Capital for Bad Boys, Inc.

Running head: FINANCIAL MANAGEMENT
Financial Management
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FINANCIAL MANAGEMENT
1
Table of Contents
1. Identifying the cost of capital for Bad Boys, Inc:..................................................................2
2. Calculating the cost of capital for Bad Boys, Inc. when it raises capital using Debt,
Preferred and Common stock:....................................................................................................3
References and Bibliography:....................................................................................................5

FINANCIAL MANAGEMENT
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1. Identifying the cost of capital for Bad Boys, Inc:
Particulars Value
Debt rate 8%
Tax 35%
After cost of debt 8% * (1 - 35%)
After cost of debt 5.20%
Dividend 2.5
Share stock 25
Cost of preferred
stock 2.5 / 25
Cost of preferred
stock 10.00%
Expected dividend 1.5
Market price 20
Growth rate 5%
Cost of common stock (1.5 / 20) + 5%
Cost of common stock 12.50%
The above table provides information regarding the weighted average cost of capital
for Bad Boys, Inc, which are calculated to be at the level of 9.09%. The after tax cost of debt
is at the level of 5.20%, which is mainly derived after deducting the debt cost of 8% from the
35% tax rate. Thus, the calculation indicted that the tax is deductible from the debt interest
rate and can be used in the calculation for deriving the appropriate values for the cost of
capital. The next calculation is mainly conducted for detecting the cost of preferred stock,
which is derived from the dividend and the cost of preferred stock. The dividend provided
from the preferred stock is 2.5, while the preferred stock share value is at 25, which makes
the cost of preferred stock to be at the levels of 10%. However, there is no tax deductibility
for such cost, which make the overall cost of capital of preferred at the levels of 10%.