The difference between the offering price and buying price of the underwriters. Introduction: The investment companies that act as an intermediary between the company that sells securities and the public that makes investment are the underwriters.

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 15, Problem 15.4CTF

Summary Introduction

To determine: The difference between the offering price and buying price of the underwriters.

Introduction:

The investment companies that act as an intermediary between the company that sells securities and the public that makes investment are the underwriters.

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