To calculate Bad Boys, Inc.'s cost of capital, we need to use the weighted average cost of capital (WACC) formula, which is:
WACC = (E/V) x Re + (D/V) x Rd x (1 - Tc) + (P/V) x Rp
where:
E is the market value of equity
D is the market value of debt
P is the market value of preferred stock
V is the total market value of the firm (E + D + P)
Re is the cost of equity
Rd is the cost of debt Rp is the cost of preferred stock
Tc is the corporate tax rate
However, to use this formula, we need to know the values of E, D, P, Re, Rd, Rp, and Tc for Bad Boys, Inc. Unfortunately, these values are not given in the question, so we cannot compute the exact WACC for Bad Boys, Inc. without making some assumptions or estimates.
However, we can use the percentages given in the question to find the weights of each component of capital in the WACC formula. These weights are:
E/V = 0.65 (65% common stock)
D/V = 0.30 (30% debt) P/V = 0.05 (5% preferred stock)
We can also use some general formulas or methods to estimate the costs of each component of capital, based on some web search results. These are:
Re = Rf + Beta x (Rm - Rf), where Rf is the risk-free rate, Beta is the systematic risk of the stock, and Rm is the market return. This is known as the capital asset pricing model (CAPM)1.
Rd = YTM, where YTM is the yield to maturity on the firm’s debt. This is the interest rate that the firm pays on its debt2.
Rp = D/P0, where D is the annual preferred dividend and P0 is the current price of preferred stock. This is similar to a perpetuity formula3. c = The statutory corporate tax rate in the country where the firm operates. For example, in the US, the federal corporate tax rate is 21%4.
Using these formulas and methods, we can estimate the WACC for Bad Boys, Inc. if we have some data on its financial performance and market conditions. However, without such data, we cannot give a precise answer to the question. Therefore, we can only say that:
The cost of capital for Bad Boys, Inc. is equal to its weighted average cost of capital (WACC), which depends on its capital structure and its costs of equity, debt, and preferred stock. To calculate its WACC, we need to use some formulas and methods that require more information than what is given in the question. Therefore, we cannot compute its exact WACC without making some assumptions or estimates.