market cannibalization wacc - Fin534 |1 Ravikumar Patel...

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F i n 5 3 4 | 1 Ravikumar Patel ASSIGNMENT 4 RAVIKUMAR PATEL (SU200245464) PROF.- DR. INGRID P. NELSON FIN 534: FINANCIAL MANAGEMENT DATE: 5/22/2017 STRAYER UNIVERSITY
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F i n 5 3 4 | 2 Ravikumar Patel 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? WACC =Ke*We + Kp*Wp + Kd*Wd WACC = weighted average cost of capital Ke= cost of equity We= weight of equity Kp= cost of preference shares Wp= weight of preference shares Kd= cost of debt Wd= weight of debt A, Ke =1.50*(1+0.05)/20 =0.07875
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F i n 5 3 4 | 3 Ravikumar Patel Kp= 2.50/25 =0.1 Kd =0.08(1-0.35) =0.052 WACC= (0.07875*0.5) + (0.1*0.05) + (0.052*0.45)
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