Homework 4

A. 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. 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 cost of capital?