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Hey, could I get assistance on this question (WACC calculation) On January 1, the total market value of Western Oil Co. was $100 million. During
Hey, could I get assistance on this question (WACC calculation)
On January 1, the total market value of Western Oil Co. was $100 million. During the year, the company plans to raise and invest $42 million in new projects. The firm's present market value debt-to-equity ratio is 1.8:1. Assume that there is no short-term debt. New bonds will have a 7% coupon rate, and they will be sold at par. Common stock is currently selling at $50 a share. Shareholders' required rate of return consists of a dividend yield of 2% and an expected constant growth rate of 6%. The corporate tax rate is 30%. a. To maintain the present capital structure, how much of the new investment must be financed by common equity? b. Assume that there is sufficient cash flow such that Western can maintain its target capital structure without issuing additional shares of equity. What is the WACC? c. Suppose now that there is not enough internal cash flow and that the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACCStep by Step Solution
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