On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s
Debt $30,000,000
Common equity 30,000,000
Total capita l $60,000,000
New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. Stockholders’ required
a. To maintain the present capital structure, how much of the new investment must be financed by common equity? b. Assume that there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity. What is the WACC?
c. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC?
do not use excel
Trending nowThis is a popular solution!
Step by stepSolved in 3 steps
- Assume that you are on the financial staff of Jerry Inc., and you have collected the following data: The yield on the company's outstanding bonds is 8.75%; its tax rate is 40%; the next expected dividend is $0.75 a share; the dividend is expected to grow at a constant rate of 7.00% a year; the price of the stock is $15.00 per share; and the target capital structure is 40% debt and 60% common equity. What is the firm's WACC? 9.04% 9.80% 8.44% O7.64% 9.30%arrow_forwardOn January 1, 2009 the total assets of the Shipley Company were $ 180 million. During the year, the company plans to raise and invest $ 90 million. The firm's present capital structure is considered optimal.Assume that there is no short term debt. Long term debt 90,000,000 Common Equity 90, 000, 000 Total Liabilities and Equity 180,000,000 Project B Cash flow (2000) New bonds will have a coupon rate of 10% and will sell at par. Common stock, currently selling at $ 40 a share can be sold to net the company at$36 a share. Stockholders' required rate of return is 12%. (The next expected dividend is $1.60). Retained earnings are estimated to be $9 million. The tax rate is 40%. a. To maintain the present capital structure, how much of the capital budget must Shipley finance by equity? b. How much of the new equity funds needed must be generated internally?Externally? c. Calculate the cost of each of the equity components. d. Calculate the weighted average cost of capital.arrow_forwardWACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $15 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have a 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. $ a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital…arrow_forward
- Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.arrow_forwardOn January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $20 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have a 10% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ Assuming there is sufficient cash flow for Tysseland to maintain its target capital…arrow_forwardWACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $10 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt Common equity Total capital $30,000,000 30,000,000 $60,000,000 New bonds will have a 6% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education