Question
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
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 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 30%.
| WACC Equation | |||
| Market value of debt | $30,000,000 | ||
| Market value of common equity | 30,000,000 | ||
| Total market value | $60,000,000 | ||
| New project investment | $30,000,000 | ||
| Coupon rate of of par value bonds | 7.00% | ||
| Price of common stock | $30.00 | ||
| Required return of common stock, rs | 12.00% | ||
| Dividend yield, D1/P0 | 4.00% | ||
| Constant growth rate, g | 8.00% | ||
| Tax rate | 30.00% | ||
| Formulas | |||
| Amount of new investment financed with common equity | #N/A | ||
| WACC, assuming no new common equity | #N/A | ||
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