Figure 1 BERKSHIRE INSTRUMENTS Statement of Financial Position December 31, 2004 $ 400,000 200,000 $ 2,600,000 300.000 2,300,000 5.500.000 S 8,400,000 Assets Current assets Cash Marketable securities. Accounts receivable...... Less: Allowance for bad debts Inventory... Total current assets Fixed Assets: Plant and equipment, original cost. Less: Accumulated depreciation... Net plant and equipment... Total assets Llabllitles and Stockholders' Equity Current liabilities: Accounts payable. Accrued expenses Total current liabilities. Long-term financing Bonds payable.. Preferred stock.. 30,700,000 13.200.000 17.500.000 525.900.000 $ 6,200,000 1.700.000 7,900,000 + $ 6,120,000 1,080,000 6,300,000 Retained carnings } Common equity Total common equity... Total long-term financing Total liabilities and stockholders' equity.. 10,800,000 = 3.000.000 525.900.000 Figure 2 Cost of prior issues of debt and preferred stock Security Bond, Bond Bond Preferred stock Preferred stock Year of Issue 1992 1996 2002 1997 2000 Amount $1,120,000 3,000,000 2,000,000 600,000 480,000 Yield 6.1% 13.8 12.0 79 formulas: one: one for the cost of retained earnings and one for the cost of new common stock. His investment banker suggested that he follow the normally accepted approach used in determining the marginal cost of capital. First, determine the cost of capital for as large a capital structure as current retained earnings will support; then, determine the cost of capital based on exclusively using new common stock 3. Assume the investment banker also wishes to use the capital asset pricing model, as shown in Formula 11.5 in the text, to compute the cost (required return) on common stock. Assume Ry = 6 percent, B is 1.25, and K. is 13 percent. What is the value of Kj? How does this compare to the value of K, computed in question 1