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 here, 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?

b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital

structure 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.