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? Coupon rate 8% Type of Finance Weighted Given Before After Weight X After 2.50 preferred dividend per share Debt 45% 3% 5.2% 2.34% $1.50 common dividend per share Perferred Stock 5% 10 10 50.00% Tax Rate 35% Common Stock 50% 8% 12.5% 5.25% 25 Preferred Share 0.00% $20 common share 15% increase in capital debt % preferred stock Type of Finance Weighted Given Before After Weight X After 0% common stock Debt 30% 8% 5.6% 1.68% Preferred Stock 5% 10 10 50.00% Common Stock 65% 2% FALSE 0.00% 51 68%