Foundations Of Finance
Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 11, Problem 13MC
Summary Introduction

Case summary:

It’s been 2 months since individual X took a position as a collaborator budgetary examiner at C Items. In spite of the fact that your boss has been satisfied with his work, he is still a bit reluctant almost unleashing individual X without supervision. Individual X's other task includes both the calculation of money streams related to a modern venture beneath thought and the assessment of a few commonly select ventures. Given individual X's need for residency at C, y have been asked not as it were to supply a suggestion but too to reply to a number of questions pointed at judging his understanding of the capital budgeting handle. We are considering the presence of an unused item. As of now, we are within the 21 percent minimal charge bracket with a 15 percent required rate of return or cost of capital. This extend is anticipated to final 5 a long time and after, that since usually to some degree of a prevailing fashion item, be ended.

To determine: The manner in which simulation works and the value in using a simulation approach.

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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…
7. Berkeley Farms wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans:  Cost      (aftertax)  Weights Plan A   Debt ..................................  4.0% 30% Preferred stock ..................  8.0 15 Common equity .................  12.0 55 Plan B   Debt ..................................  4.5% 40% Preferred stock ..................  8.5 15 Common equity .................  13.0 45 Plan C   Debt ..................................  5.0% 45% Preferred stock ..................  18.7 15 Common equity .................  12.8 40 Plan D   Debt ..................................  12.0% 50% Preferred stock ..................  19.2 15 Common equity .................  14.5 35 a. Which of the four plans has the lowest weighted average cost of capital?  Use the Kd (cost of debt) = Y(1 - T), Kp (Cost of preferred stock) = Dp/Pp - F, Ke = D1/P0 + g formulas or I will not understand.
Need use the Kd (cost of debt) = Y(1 - T), Kp (Cost of preferred stock) = Dp/Pp - F, Ke = D1/P0 + g formulas or I will not understand.  Delta Corporation has the following capital structure:                                                                                             Cost                          Weighted                                                                                        (after-tax)      Weights       Cost Debt                                                                                      8.1%          35%         2.84% Preferred stock (Kp)                                                             9.6               5              .48 Common equity (Ke) (retained earnings)                             10.1            60            6.06  Weighted average cost of capital (Ka)                                                                    9.38%                                                                                a. If the firm has $18…
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