Mortgage bonds $2,000 Debentures 1,500 Retained earnings 500 1. What is the curr

Question

Mortgage bonds $2,000

Debentures 1,500

Retained earnings 500

1. What is the current financial mix? Answer: _________________________

The president informed you that DWOTT has chosen to raise capital by issuing stocks and bonds in the ratio of 6.5:3.5. 2. What does that mean for your company?

He also wants to know the WACC and has given you the following information about your capital budgeting: The 20 year $1000 par value mortgage bonds were sold at $952.67 and pay 8%. They had a $47.67 flotation cost.

3. What is the cost of the mortgage bonds?

Answer: _________________________

Explanation / Answer

Current Financial Mix = Debt / Equity = (2000+1500)/500 = 3500 : 500= 7 : 1

So Debt = 7/8 and Equity = 1/8

3)

Price of bond= $952.67

Price including flotation costs = 952.67*(1-47.67/952.67)= $905

Cost of mortgage bonds= rate(nper,pmt,pv) = rate(20,80,-905) = 6.17%

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