PERSONAL FINANCE
PERSONAL FINANCE
5th Edition
ISBN: 9781308498706
Author: Kapoor
Publisher: McGraw Hill
Question
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Chapter 8, Problem 1CC
Summary Introduction

Case summary:

J, lady wants to buy a new car as her old car has been completed its last mile. She saw one of the advertisements in newspaper and decided to visit the car dealers. J was confused in the regards to buy a new car or an old one and go for down payment or lease. She has the option to go for the option of no money and $219 for a month. She go through her credit ratings and analyze that she has a good credit score. After that she got excited after inquired about a new advertisement of new car. As sales man said she has the approved credit rating but there are some qualifications in the regards to buying the new car on a cheaper price. The salesman give an offer to provide the car if she would pay an additional amount of $110 per month which was not there in the budget of J. She decided to research about the various sites self and then goes to another salesperson.

Characters in case: The characters in the case are as follows:
J, a lady, on whom the case is based on,
The salesperson who informed her about the car

Adequate information: The online and offline services are available to buy a new or old car.

To explain:

The two possible choices of the car buying which can help in buying a used car within her budget.

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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…
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