The impact on the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession Introduction: Recession − A business cycle contraction where the economic activities slow down. This decline in the economic activities continues for month and is seen in different sectors like trade, industrial production, income, employment. Treasury bills − These are the bills that the government uses to borrow money from the public. This is the simplest borrowing form. These are short terms government securities. These securities are given at discount from the face value and return to face value amount on maturity. Commercial paper − The short term unsecured debt notes which are given to the public directly by the large well-known companies are called commercial papers. The companies use this for borrowing instead of borrowing from the banks. These may be backed by the bank line of credit.

Question

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 million in retained earnings, at what size capital structure will the firm run out of retained earnings? b. The 8.1 percent cost of…

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Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

Chapter 2, Problem 30PS

Summary Introduction

To determine:

The impact on the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession

Introduction:

Recession − A business cycle contraction where the economic activities slow down. This decline in the economic activities continues for month and is seen in different sectors like trade, industrial production, income, employment.

Treasury bills − These are the bills that the government uses to borrow money from the public. This is the simplest borrowing form. These are short terms government securities. These securities are given at discount from the face value and return to face value amount on maturity.

Commercial paper − The short term unsecured debt notes which are given to the public directly by the large well-known companies are called commercial papers. The companies use this for borrowing instead of borrowing from the banks. These may be backed by the bank line of credit.

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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 million in retained earnings, at what size capital structure will the firm run out of retained earnings? b. The 8.1 percent cost of…

Dillon Enterprises has the following capDillon Enterprises has the following capital structure. Debt ........................ 40% Common equity ....... 60 The after-tax cost of debt is 6 percent, and the cost of common equity (in the form of retained earnings) is 13 percent. What is the firm’s weighted average cost of capital? a. An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the after-tax cost of debt is 7 percent, and the cost of common equity (in the form of retained earnings) is 15 percent. Recalculate the firm’s weighted average cost of capital. b. Which plan is optimal in terms of minimizing the weighted average cost of capital?

Compute Ke and Kn under the following circumstances: a. D1= $5, P0=$70, g=8%, F=$7 b. D1=$0.22, P0=$28, g=7%, F=2.50 c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0= $30, g=6%, F=$2,20. Note: D1 is the earnings times the payout rate. d. D0 (dividend at the beginning of the first period) = $6, growth rate for dividends and earnings (g)=7%, P0=$60, F=$3. You will need to calculate D1 (the dividend after the first period).

Answer 2

Question

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

Chapter 2, Problem 30PS

Summary Introduction

To determine:

The impact on the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession

Introduction:

Recession − A business cycle contraction where the economic activities slow down. This decline in the economic activities continues for month and is seen in different sectors like trade, industrial production, income, employment.

Treasury bills − These are the bills that the government uses to borrow money from the public. This is the simplest borrowing form. These are short terms government securities. These securities are given at discount from the face value and return to face value amount on maturity.

Commercial paper − The short term unsecured debt notes which are given to the public directly by the large well-known companies are called commercial papers. The companies use this for borrowing instead of borrowing from the banks. These may be backed by the bank line of credit.

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Answer 3

Question

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

Chapter 2, Problem 30PS

Summary Introduction

To determine:

The impact on the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession

Introduction:

Recession − A business cycle contraction where the economic activities slow down. This decline in the economic activities continues for month and is seen in different sectors like trade, industrial production, income, employment.

Treasury bills − These are the bills that the government uses to borrow money from the public. This is the simplest borrowing form. These are short terms government securities. These securities are given at discount from the face value and return to face value amount on maturity.

Commercial paper − The short term unsecured debt notes which are given to the public directly by the large well-known companies are called commercial papers. The companies use this for borrowing instead of borrowing from the banks. These may be backed by the bank line of credit.

Expert Solution & Answer

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Answer 4

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Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

Chapter 2, Problem 30PS

Summary Introduction