The annual payment is $230 for next 15 years at 11% of an opportunity cost rate. Present value of an annuity is the current value of future payment or the present value of a series of future periodic payments made at the end of each payment period. P V Annuity = P M T [ 1 − 1 ( 1 + r ) n r ] Present value of an annuity due is the current value of future payment or the present value of a series of future periodic payments made at the beginning of each payment period. P V Annuity due = P M T [ ( 1 − 1 ( 1 + r ) n ) × ( 1 + r ) r ] Here, The present value of an annuity is “ P V Annuity ”. The periodic payments are “ PMT ”. The interest rate is “ r ”. The maturity period of number of years is “ n ”.

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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…

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Question

Chapter 4, Problem 12PROB

Summary Introduction

The annual payment is $230 for next 15 years at 11% of an opportunity cost rate.

Present value of an annuity is the current value of future payment or the present value of a series of future periodic payments made at the end of each payment period.

PVAnnuity=PMT[1−1(1+r)nr]

Present value of an annuity due is the current value of future payment or the present value of a series of future periodic payments made at the beginning of each payment period.

PVAnnuity due=PMT[(1−1(1+r)n)×(1+r)r]

Here,

The present value of an annuity is “PVAnnuity”.

The periodic payments are “PMT”.

The interest rate is “r”.

The maturity period of number of years is “n”.

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