M4 Licola, Inc. is currently an all-equity firm and has just announced plans to expand itscurrent operations. To fund this expansion, Licola needs to raise $225 million in newcapital. Following the expansion, Licola is expected to generate earnings beforeinterest and taxes of $100 million per year in perpetuity. Although Licola has alreadyannounced the planned expansion, it has not yet determined how best to fund theexpansion. The firm currently has 30 million shares outstanding and following theexpansion announcement, its shares are now trading at $30 per share. Licola canborrow at a rate of 10% or issue new equity at $30 per share. Assume that allearnings are paid as dividends. If Licola chooses to finance its expansion by issuingnew stock, its cost of equity will be closest to:4.05%5.64%7.07%8.89%O None of the above

Current equity value=30 million shares x$30 Current equity value=$900 million

Answered: announc nto of

Business

Accounting

announc nto of

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Licola, Inc. is currently an all-equity firm and has just announced plans to expand its
current operations. To fund this expansion, Licola needs to raise $225 million in new
capital. Following the expansion, Licola is expected to generate earnings before
interest and taxes of $100 million per year in perpetuity. Although Licola has already
announced the planned expansion, it has not yet determined how best to fund the
expansion. The firm currently has 30 million shares outstanding and following the
expansion announcement, its shares are now trading at $30 per share. Licola can
borrow at a rate of 10% or issue new equity at $30 per share. Assume that all
earnings are paid as dividends. If Licola chooses to finance its expansion by issuing
new stock, its cost of equity will be closest to:
4.05%
5.64%
7.07%
8.89%
O None of the above

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