On January 1, the total market value of the Tysseland Company was $60 million. During theyear, the company plans to raise and invest $30 million in new projects. The firm's pres-ent market value capital structure, shown here, is considered to be optimal. There is noshort-term debt.(9-15)WACC EstimationDebt$30,000,000Common equity30,000,000Total capital$60,000,000New bonds will have an 8% coupon rate, and they will be sold at par. Common stock iscurrently selling at $30 a share. The stockholders' required rate of return is estimatedto be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/S30 = 4%.) Themarginal tax rate is 25%.a. In order to maintain the present capital structure, how much of the new investmentmust be financed by common equity?b. Assuming there is sufficient cash flow for Tysseland to maintain its target capitalstructure 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 issuenew shares of stock. Qualitatively speaking, what will happen to the WACC? Nonumbers are required to answer this question.

Answered: Image /qna-images/answer/a536f387-9e08-4c90-b781-ad1344250c77.jpg

Answered: On January 1, the total market value of…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 11%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2, and the current stock price is $26. a. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. % b. If the firm's net income is expected to be $1.6 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate (1-Payout ratio)ROE %

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