(A) Adequate Information: In this situation, the current market price of the telecom share is $50 and the investor has decided to short sell 100 shares at the prevailing price. To calculate: The value of securities or cash that need to be kept in the trading account so as to satisfy the 50% requirement of the initial margin by the broker Introduction: Brokerage account refers to the arrangement underlying a licensed broker and an investor. The broker allows the investor to add funds in the account that he has opened with the firm and buy or sell, the investment in lieu of a commission or brokerage fees charged by broker on each order

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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Chapter 3, Problem 19PS

Summary Introduction

(A)

Adequate Information:

In this situation, the current market price of the telecom share is $50 and the investor has decided to short sell 100 shares at the prevailing price.

To calculate:

The value of securities or cash that need to be kept in the trading account so as to satisfy the 50% requirement of the initial margin by the broker

Introduction:

Brokerage account refers to the arrangement underlying a licensed broker and an investor. The broker allows the investor to add funds in the account that he has opened with the firm and buy or sell, the investment in lieu of a commission or brokerage fees charged by broker on each order

Summary Introduction

(B)

To calculate:

The price of the stock that enables the investor to get margin call

Introduction:

Margin call comes into picture when the investor is required to deposit additional securities or money so that the margin in the investor's account stands equivalent to the minimum margin requirement.

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