11-8: The Weighted Average Cost of Capital (WACC) Problem Walk-Through Problem 11-15 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 $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that 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 7% 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 $1.20/$30 = 4%.) The marginal corporate 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? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000. $ b. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. % 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? -Select- v I. rs will decrease and the WACC will increase due to the flotation costs of new equity. II. rs and the WACC will not be affected by flotation costs of new equity. III. rs and the WACC will increase due to the flotation costs of new equity. IV. rs and the WACC will decrease due to the flotation costs of new equity. V. rs will increase and the WACC will decrease due to the flotation costs of new equity. 11-8: The Weighted Average Cost of Capital (WACC) Problem Walk-Through Problem 11-15 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 $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that 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 7% 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 $1.20/$30 = 4%.) The marginal corporate 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? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000. $ b. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. % 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? -Select- v I. rs will decrease and the WACC will increase due to the flotation costs of new equity. II. rs and the WACC will not be affected by flotation costs of new equity. III. rs and the WACC will increase due to the flotation costs of new equity. IV. rs and the WACC will decrease due to the flotation costs of new equity. V. rs will increase and the WACC will decrease due to the flotation costs of new equity