Question

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link above.

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?

B. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad Boys cost of capital?

C. In your own words, identify two corporations that have dealt with cannibalization and what steps were taken to overcome the cannibalization. Please provide any citations and references. Please be articulate in your responses.

Answer 1

WACC = E/V × Re + D/V × Rd × (1 - Tc)

E = market value of the firm’s equity (market cap)
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate

The cost. of. equity. was 12.5% and that. was based on the $1.50 for next year, the current. selling.. of. share $20.00 and a. growth .rate of 5%. Based on the. calculations the cost .of capital will be 27.73%. This was. based. on the cost .of equity of 12.5%, the 5% preferred. stock, the 45% of the cost of debt, the common. stock of 50%, and. the tax .rate of 35%

B) WACC = (30% X 5.2%) + (5% X 10%) + (65% *X 12.50%) = 10.9%

C) AS. new product eats. up the sales and .requirement of the existing product, therefore, reducing the. overall sale of the. company even. if the sale of the new. product is increasing

it has been. estimated. that two-thirds. of the sales. of Gillette's Sensor. razor came from. consumers who would otherwise. have. been customers for the company's other razors. Each new blade. is cut-throat. competition for its predecessors.There are sound reasons for firms to. do such .a seemingly. stupid thing. In the. first place, they may need to keep. .ahead of the. competition. In the .chocolate-bar. market in .Britain, for instance, the. decline in .Kit Kat's share. was .arrested by .the launch of a new, more. chunky bar, which. undoubtedly .cannibalized .the market. for the original. Its .appeal was to all .those people. who .buy. chocolate bars, .which .includes .those who .bought the. old .Kit Kat.

here is another example of Proctor and gamble

"Product A sells, 5000 units .at a .profit of $100 that’s. $500,000 .profit. Product B, the .projected .product. will .sell 1000 units but. the profit is $150 in the .first year. However, .by introducing Product B, .sales. for Product A have dropped. by. 1000 units. The profit. is calculated at 4000 X $100 = $400,000 for product. A, and 1000 X $150 = $150,000. for. product B. The new. profits. are now $550,000. This .means .your .profits .increased by 10% by. cannibalizing into .your other .products"

https://www.economist.com/node/14248815

When to Cannibalize Your Existing Products. MCNG Marketing April 3, 2013. http://www.mcngmarketing.com/when-to-cannibalize-your-existing-products/#.WSv9-UfHfIU

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