(9–15)

WACC 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 $30 million in new projects.

The firm’s present market value capital structure, 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% 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 40%.

a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity?