a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. 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. % c.
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 $15 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt.
Debt $30,000,000
Common equity 30,000,000
Total capital $60,000,000
New bonds will have a 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required
a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar.
- 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.
I. rs will decrease and the WACC will increase due to the flotation
costs of new equity.
II. rs and the WACC will not be affected by flotation costs of new equity.
III. rs and the WACC will increase due to the flotation costs of new equity.
IV. rs and the WACC will decrease due to the flotation costs of new equity.
V. rs will increase and the WACC will decrease due to the flotation costs of new equity.
Trending now
This is a popular solution!
Step by step
Solved in 6 steps
