The market value of the company is $60 mil, and it plans to raise and invest $30 mil in new projects. The current capital structure is optimal at $30 mil in debt, and $30 mil in common stock. New bonds will have an 8% coupon rate, and they will be sold at par value. Its common stock is currently selling at $30 per share, and the stockholders' required return is 12% (consisting of 4% dividend yield with the expected dividend of $1.20 per share, and 8% growth). The stated tax rate is 25%. A. In order to maintain the current capital structure, how much of the new investment must be financed by common stock? B. Assuming there is sufficient cash flow to maintain the target capital structure without issuing any additional share of common stock, calculate the overall cost of capital to the company, WACC.
The market value of the company is $60 mil, and it plans to raise and invest $30 mil in new projects. The current capital structure is optimal at $30 mil in debt, and $30 mil in common stock. New bonds will have an 8% coupon rate, and they will be sold at par value. Its common stock is currently selling at $30 per share, and the stockholders' required return is 12% (consisting of 4% dividend yield with the expected dividend of $1.20 per share, and 8% growth). The stated tax rate is 25%. A. In order to maintain the current capital structure, how much of the new investment must be financed by common stock? B. Assuming there is sufficient cash flow to maintain the target capital structure without issuing any additional share of common stock, calculate the overall cost of capital to the company, WACC.
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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am. 104.
Transcribed Image Text:The market value of the company is $60 mil, and it plans to raise and invest $30 mil in new projects. The current capital structure is optimal at $30 mil in debt, and $30 mil in
common stock. New bonds will have an 8% coupon rate, and they will be sold at par value. Its common stock is currently selling at $30 per share, and the stockholders'
required return is 12% (consisting of 4% dividend yield with the expected dividend of $1.20 per share, and 8% growth). The stated tax rate is 25%.
A. In order to maintain the current capital structure, how much of the new investment must be financed by common stock?
B. Assuming there is sufficient cash flow to maintain the target capital structure without issuing any additional share of common stock, calculate the overall cost of capital to
the company, WACC.
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