On January 1, the total market value of the Tyseeland Company was $60 million. During the year,

Question:

On January 1, the total market value of the Tyseeland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm's present market value shown below, is considered to be optimal. Assume that there is no short-term debt.
Debt: ......... $30,000,000Common equity: ...... 30,000,000Total capital: ...... $60,000,000
New bonds will have an 8 percent rate, and they will be sold at par. is currently selling at $30 a share. Stockholder's required rate of return is estimated to be 12 percent, consisting of a yield of 4 percent and an expected constant growth rate of 8 percent. (The next expected is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 40 percent.
a. To maintain the present 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 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?

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