Q Search this course eBook Problem Walk-Through Problem 9-15 WACC Estimation On
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Q Search this course eBook Problem Walk-Through Problem 9-15 WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new proj The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt Common equity Total capital New bonds will have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate ofretumi 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 the dividend $1.20/$30 4%.) The marginal tax rate is 35%. $30,000,000 30,000,000 $60,000,000 yield a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000 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? Round your answer to two decimal places Suppose now that there is not enough internal cash flow and the firm must issue new shares numbers are required to answer this question. of stock. Qualitatively speaking, what will happen to the WACC? No d the wocc will Inc rease due to the flotation costs of new equityExplanation / Answer
1.
Current capital strucuture is Debt:Equity=1:1
Hence, the new investment should also be in the same proportion
Debt=12.5 million
Equity=12.5 million
2.
Cost of equity=Next Dividend/Price+growth rate=Expected dividned yield+growth rate=4%+8%=12%
As the bond is selling at par so ytm=coupon rate hence, pre-tax Cost of debt=8%
WACC=0.5*8%*(1-35%)+0.5*12%=8.60%
3.
Due to new equity raiisng, flotation costs will be incurred due to which cost of equity would increas and hence WACC would increase
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