The Cost of Debt and rate of 990, Flotation Costs proceeds, then what is the aft
ID: 2658193 • Letter: T
Question
The Cost of Debt and rate of 990, Flotation Costs proceeds, then what is the after-at amortization of flotation costs (9-15) On January 1, the total market value of the Tysseland Company was $60 aton the year, the company plans to raise and invest $30 million in new projects CHALLENGING PROBLEMS 15-17 on. present market value capital structure, shown here, is considered to be opt no short-term debt. $30,000,000 30,000,000 Debt Common equity Total capital $60,000,000 New bonds will have an 8% coupon rate, and they will be sold at par. Common currently selling at $30 a share. The stockholders' required rate of return is estimated tob 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 stock is 8 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.Explanation / Answer
a)
Weight of debt = 30,000,000 / 60,000,000 = 0.5
Weight of common stock = 30,000,000 / 60,000,000 = 0.5
New investment financed by equity = 0.5 * 30,000,000
New investment financed by equity = $15,000,000
b)
Since price of bond is equal to par value, before tax cost of debt will be equal to the coupon rate
WACC = weight of debt * after tax cost of debt * weight of common stock * cost of common stock
WACC = 0.5 * ( 1 - 0.4 ) * 0.08 + 0.5 * 0.12
WACC = 0.024 + 0.06
WACC = 0.084 or 8.4%
b)
When a company issues new shares os stock, there will be flotation cost attached. This will imcrease the cost of common equity which in turn will increase WACC.
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