Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed
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, here below, is considered to be optimal. There is no short-term debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 Debt New bonds will have a 7 coupon rate, and they will be sold at par. Common stock is currently seling 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 $1.20/530 = 4%.) The marginal tax rate is 25%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar 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 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? No numbers are required to answer this question. I. rs will increase and the WACC will decrease due to the rotation costs of new equity II. will decrease and the WACC will increase due to the flotation costs of new equity. III., and the WACC will not be affected by flotation costs of new equity IV. r. and the WACC will increase due to the flotation costs of new equity. V. and the WACC will decrease due to the flotation costs of new equity

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets And Institutions

Authors: Anthony Saunders, Marcia Cornett

7th Edition

1259919714, 978-1259919718

More Books

Students also viewed these Finance questions

Question

What new objectives and strategies do we need?

Answered: 1 week ago