In case of the lower coupon of a bond, features of such issue to account for such lower coupon bond. Introduction: There are a few definitions: A Callable bondis a bond which can be called any time from the investor. Sinking fund feature allows a company to retire bond of any amount at any value which is less than its par value or market value.

Question

Moose Enterprises finds it is necessary to determine its marginal cost of capital. Moose’s current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 9.6 percent; preferred stock, 9 percent; retained earnings, 10 percent; and new common stock, 11.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) b. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? c. What will the marginal cost of capital be immediately after that point? (Equity will remain at 20 percent of the capital structure, but will all be in the form of new common stock, Kn.) d. The 9.6 percent cost of debt referred to earlier…

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Question

Chapter 10, Problem 30PS

Summary Introduction

To identify:

In case of the lower coupon of a bond, features of such issue to account for such lower coupon bond.

Introduction:

There are a few definitions:

A Callable bondis a bond which can be called any time from the investor.

Sinking fund feature allows a company to retire bond of any amount at any value which is less than its par value or market value.

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