Question
.On January 1,1998, the total assets of the McCue company were $270 million. The first present capital structure, which follows, is considered optimal. Assume that
.On January 1,1998, the total assets of the McCue company were $270 million. The first present capital structure, which follows, is considered optimal. Assume that they have no short-term debt.
Long-term debt $135,000,000
Common Equity 135,000,000
_____________
Total Liabilities and Equity $270,000,000
New bonds will have a 10% coupon rate and will be sold at par. Common stocks are currently selling at $60 a share, can be sold to net the company $54 a share. Stockholders required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected growth rate of 8% (the next expected dividend is $2.4 so $2.4/$60 = 4%). Retained earnings are estimated to be $15 million. The marginal corporate tax rate is 20%. Assuming that all asset expansion (Gross expenditure plus fixed assets plus related working capital) is included in the capital budget, the amount of the capital budget, ignoring depreciation, is 160,000,000
a. To maintain the present capital structure, how much capital budget must McCue finance by equity?
$80,000,000 (160,000,000*.5) financed by equity
b. How much of the new equity funds needed will be generated internally and externally?
Internally = $15,000,000 - retained earnings
Externally = $65,000,000 (new equity funds - equity generated internally)
(80,000,000-15,000,000)
c. Calculate the cost of each of the equity components.
cost of equity (external) = div yield/(1-floatation) + growth rate
=(.04/(1-.10))+.08 = approx 12.44%
cost of equity (internal) = div yeild + growth rate
=.04+.08 = 12%
d. Calculate WACC.
total investment = 160million
80,000,000 debt - W(d)
15,000,000 retained earnings - W(re)
65,000,000 stock - W(s)
**Bold lettering are answers I've already calculated though not 100% sure on. Struggling with how to get WACC from this problem.**
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