Loose Leaf for Personal Finance
12th Edition
ISBN: 9781259720680
Author: Jack R. Kapoor, Les R. Dlabay Professor, Robert J. Hughes, Melissa Hart
Publisher: McGraw-Hill Education
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Chapter 7, Problem 1FPP
Summary Introduction
To calculate:
Finance charge.
Introduction:
Finance charge refers to the total cost of using the loan. It includes interest amount, appraisal charge and any other charge, if any.
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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…
Chapter 7 Solutions
Loose Leaf for Personal Finance
Ch. 7 - Prob. 7.1PQ1Ch. 7 - Prob. 7.1PQ2Ch. 7 - Prob. 7.2PQ1Ch. 7 - Prob. 7.2PQ2Ch. 7 - 3. Distinguish among the adjusted balance,...Ch. 7 - Prob. 7.2PQ4Ch. 7 - Prob. 7.3PQ1Ch. 7 - Prob. 7.3PQ2Ch. 7 - Prob. 7.3PQ3Ch. 7 - Prob. 7.4PQ1
Ch. 7 - Prob. 7.4PQ2Ch. 7 - Prob. 7.4PQ3Ch. 7 - Prob. 7.5PQ1Ch. 7 - Prob. 7.5PQ2Ch. 7 - Prob. 7.5PQ3Ch. 7 - Prob. 7.5PQ4Ch. 7 - Prob. 1FPPCh. 7 - Prob. 2FPPCh. 7 - Prob. 3FPPCh. 7 - Prob. 4FPPCh. 7 - Prob. 5FPPCh. 7 - Prob. 6FPPCh. 7 - Prob. 7FPPCh. 7 - Prob. 8FPPCh. 7 - Prob. 9FPPCh. 7 - Prob. 10FPPCh. 7 - Prob. 11FPPCh. 7 - Prob. 12FPPCh. 7 - Prob. 13FPPCh. 7 - Prob. 14FPPCh. 7 - Prob. 15FPPCh. 7 - Prob. 1FPACh. 7 - Prob. 2FPACh. 7 - Prob. 3FPACh. 7 - Prob. 4FPACh. 7 - Prob. 5FPACh. 7 - Handling Harassmentfrom Debt Collection Agencies....Ch. 7 - Prob. 7FPACh. 7 - Prob. 8FPACh. 7 - Prob. 9FPACh. 7 - Prob. 1FPCCh. 7 - Prob. 2FPCCh. 7 - Prob. 3FPCCh. 7 - Prob. 1CCCh. 7 - Prob. 2CCCh. 7 - Prob. 3CCCh. 7 - Describe any aspects of your spending habits that...Ch. 7 - Prob. 2DSD
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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…arrow_forwardDillon 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?arrow_forwardCompute 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).arrow_forward
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