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Old 07-24-2009, 11:20 AM
agent agent is offline
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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 $30,000,000Common Equity $30,000,000Total capital $60,000,000New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. Stockholder’s 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 40%. 1. To maintain the present capital structure, how much of the new investment must be financed by common equity? 2. Assume that there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity. What is the WACC? 3. 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?
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Old 07-24-2009, 11:20 AM
export export is offline
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get it all at :-financehomeworkhelp.4t.comAlso another guy (Professor) INFACT IS AVAILABLE AT http://www.dineshchopra.comor also athttp://www.dineshchopra.20m.comAlso you can google
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Old 07-24-2009, 11:20 AM
Luc Luc is offline
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a. Computation of maintain the present capital structure, how much of the new investment must be financed by common equityCurrentlyDebt= 30 millionEquity= 30 millionTherefore Debt: Equity= 1:1New funds required= 30 millionTherefore common equity will finance 15 million (remaining being financed by debt)Hence the $15,000,000 amount invested must be financed by common equityb. Proportion of debt= 30/60= 0.5Proportion of equity= 30/60= 0.5After tax cost of debt=rd (1-Tax rate) = 8% (1-40%) = 4.80%Cost of equity= 12%WACC=proportion of debt x after tax cost of debt + Proportion of equity x Cost of equityTherefore WACC= 8.40% =0.5x4.8%+0.5x12%WACC= 8.40%Hence the WACC is 8.40%c. If the capital structure is maintained ie Debt: Equity = 1:1 then WACC will remain the same. Retained earning is also part of equity. Thus instead of retained earning as in the previous case here the equity is being increased by the issue of new equityFor more help in Weighted Average Cost of Capital go through the following URL:http://www.transtutors.com/finance-homework-help/
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Old 10-26-2017, 08:03 PM
Desy86 Desy86 is offline
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Very informative! Good topic.
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Old 06-19-2018, 02:43 PM
damponting44 damponting44 is offline
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I would like to suggest you go to universityhomeworkhelp.com site this site helps finance homework and also like to suggest another one site financehomeworkhelp.net also help you.
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