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

Question:

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 present market value shown 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 an 8% rate, and they will be sold at par. is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a yield of 4% and an expected constant growth rate of 8%. (The next expected is $1.20, so the yield is $1.20/$30 = 4%.) The marginal tax rate is 40%.
a. In order to maintain the present how much of the new investment must be financed by common equity?
b. Assuming there is sufficient cash flow for Tysseland to maintain its target without issuing additional shares of equity, what is its 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? No numbers are required to answer this question.

Common Stock
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Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Coupon
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A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...