A-Z Excel Online Structured Activity: 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 $15 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 Common equity $30,000,000 30,000,000 $60,000,000 Total capital 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 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer Question below. 1 Open spreadsheet Open spreadsheet 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. Round your answer to the nearest dollar. Do not round intermediate calculations 5 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. Do not round Intermediate calculations. 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? 1. t, and the WACC will increase due to the flotation costs of new equity. II. r, and the WACC will decrease due to the flotation costs of new equity. III. r, will increase and the WACC will decrease due to the flotation costs of new equity. IV. r, will decrease and the WACC will increase due to the flotation costs of new equity. V.t, and the WACC will not be affected by flotation costs of new equity B C D F WACC Equation 1 > 3 4 5 Market value of debt Market value of common equity Total market value $30,000,000 30,000,000 $60 000 000 New project investment $15.000.000 Coupon rate of of par value bonds 10 Price of common stock 11 Required return of common stock 12 Dividend yield. D.P. 13 Constant growth rate, 9 14 Tax rate 15 16 Amount of new investment financed with common equity 17 (WACC, assuming no new common equity 18 19 20 7.00% $30.00 12.00% 4009 8009 35.00% Formulas NA #NA 22
