Haley\'\'s Eco lights is a manufacturer of enery-saving lights, with which it ha
ID: 2802533 • Letter: H
Question
Haley''s Eco lights is a manufacturer of enery-saving lights, with which it has had success. As such it is planning for sales growth that requires a substantial expansion of its manufacturing capacity. as it is now at the upper limits of its relevant range. this investment in new fixed assets will be 15 million.
Haley plans to maintain its current 30% debt to total assets ratio for its capital structure for the new acquisitions. Haley's current debt to total assets ratios ratio is also its target capital structure. It also wants to maintain its currrent divident payout ratio .to shareholders of 55% of net income. This year's net income was 8 million.Haley's after tax cost of equity is 12%. its pre tx cost of debt is 6% its tax rate is 40% and its after tax cost of debt is 3.6 %. A. to maintain its target capital structure, how much of the new investment will be financed through debt and how much will be financed through equity.? B. how much of the equity requirement in part will be provided from this year's income? C.It the total equity requirement in part can't be provided from net income, then how much will have to come form new equity? D. how much would net income have to grow for haley to be able to internally finance all of the equity requirement for the new investment out of net income only? E What is hale's weighted average cost capital WAAC?
Explanation / Answer
(a) Given D/(D+E) = 0.3 ; D = 0.3D + 0.3E; 0.7D =0.3E; D = 0.3E/0.7
If E =1 , D = 0.42857
To maintain same tarhet capital Equity will be 1/1.42857 = 0.7 and Debt will be 1-0.7 = 0.3
Debt = 0.3*15,000,000 = 4,500,000 and equity = 0.7*15,000,000 = 10,500,000
(b) Net Income = 8,000,000
Payout = 55% = 0.55*8,000,000 = 4,400,000
Retained Earnings = 8,000,000 -4,400,000 = 3,600,000
how much of the equity requirement in part will be provided from this year's income? 3,600,000
(C) New equity = 10,500,000 -3,600,000 = 6,900,000
(D) Net Income*(1-0.55) = 10,500,000
Net Income = 10,500,000/(1-0.55) = 23,333,333.33
(E) WACC = 0.3*3.6 + 0.7*12 = 9.48%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.