Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period. Introduction: Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

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…

Answer 1

Question

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

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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…

Answer 2

Question

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

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Answer 3

Question

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

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Answer 4

Question

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

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Answer 5

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

Answer 6

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

Answer 7

Chapter 22, Problem 4CP

a.

Summary Introduction

To evaluate: Whether the investor should purchase or sell the forward contract in order to protect the value of the bond from rising interest rate during the holding period.

Introduction:

Forward contract: It is supposed to be a contract made between two parties which is customized according to the needs of the parties. The contract is regarding purchase or sale of an asset at a specific price agreed by the two parties. This transaction will take place on a future date.

Answer 8

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

Answer 9

b.

Summary Introduction

To determine: The value of forward contract for the investor at the maturity period assuming Mr. VanHusen’s forecast is accurate.

Introduction:

Holding period: It is supposed to be the time for which the investment is held by the investor. In other words, it can be the period of the investment between the activity of purchase and sale of a security.

Answer 10

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

Answer 11

c.

Summary Introduction

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

Answer 12

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Answer 23

Ch. 22 - Prob. 1PS Ch. 22 - Prob. 2PS Ch. 22 - Prob. 3PS Ch. 22 - Prob. 4PS Ch. 22 - Prob. 5PS Ch. 22 - Prob. 6PS Ch. 22 - Prob. 7PS Ch. 22 - Prob. 8PS Ch. 22 - Prob. 9PS Ch. 22 - Prob. 10PS

Solution Summary: The author evaluates whether the investor should purchase or sell the forward contract to protect the bond's value from rising interest rates during the holding period.

Concept explainers

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To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

Chapter 22 Solutions

Solution Summary: The author evaluates whether the investor should purchase or sell the forward contract to protect the bond's value from rising interest rates during the holding period.

Concept explainers

Videos

To determine: The change in the value of combined portfolio six months after the contract initiation. Introduction: Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.

Chapter 22 Solutions

To determine: The change in the value of combined portfolio six months after the contract initiation.

Introduction:

Portfolio: In finance, a portfolio can be defined as a range of investments that are held by a person or an organization.