Tijuana Brass Instruments Company is a manufacturing entity for brass saxophones in which the price of one saxophone is 20,000 and the cost to produce one unit is 5,000, during the year the entity earned a gross sales of 8,000,000 and recorded a net profit after tax of 2,000,000 during the year. It's dividend policy is to maintain a 2.00 dividend per share of common stock. The company intends to maintain its current capital structure for the proposed expansion project amounting to 4,000,000. Retained earnings is treated as common equity for capital budgeting purpose however, the cost of capital for retained earnings is only 14% while for the common stock it is computed to be at 15%. Any deficiency that cannot be fulfilled by retained earnings will be satisfied through the issuance of additional shares. Furthermore, each type of bonds payable can only be issued up to a maximum amount of 1,000,000 Par Value and the management tends to maximize bonds with the cheapest cost of debt. The entity is subjected to a 50% income tax rate.

Partial Balance Sheet Bonds Payable - 10% 3,600,000.00 Preferred Share Capital 2,000,000.00 Share Premium Preference Shares 400,000.00 Common Share Capital 3,000,000.00 Share Premium Common Equity 1,000,000.00 Retained Earnings 2,000,000.00 Total Liabilities and Owner's Equity 12,000,000.00 Market Value of External Financing Ordinary Preferred Bonds Bonds Shares Shares Payable 1 Payable 2 Par Value 10 200 100 100 Market Price 20 250 110 80 Interest Rate 0% 11% 9% Preference Rate 0% 10% 0% 0%