Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 9, Problem 15P
a)
Summary Introduction
To determine: The new investment must be financed by common equity.
b)
Summary Introduction
To determine: The weighted average cost of capital.
c)
Summary Introduction
To determine: The impact on WACC.
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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 projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt.
Debt
$30,000,000
Common equity
30,000,000
Total capital
$60,000,000
New bonds will have an 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is 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 $1.20/$30 = 4%.) The marginal corporate tax rate is 35%.
The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Open spreadsheet
In order to maintain the present capital structure, how much of the…
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
Common equity
$30,000,000
Total capital
30,000,000
$60,000,000
New bonds will have a 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The
stockholders' required rate of return is 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 yield is $1.20/$30 = 4%.) The marginal tax rate is 25%.
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…
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value capital structure, shown 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 an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is 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 yield is $1.20/$30 = 4 %.) The marginal tax rate is 40%.
a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity?
b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of…
Chapter 9 Solutions
Financial Management: Theory & Practice (MindTap Course List)
Ch. 9 - Define each of the following terms: a. Weighted...Ch. 9 - Prob. 2QCh. 9 - Prob. 3QCh. 9 - Distinguish between beta (i.e., market) risk,...Ch. 9 - Suppose a firm estimates its overall cost of...Ch. 9 - Calculate the after-tax cost of debt under each of...Ch. 9 - Prob. 2PCh. 9 - Duggins Veterinary Supplies can issue perpetual...Ch. 9 - Prob. 4PCh. 9 - Summerdahl Resorts common stock is currently...
Ch. 9 - Booher Book Stores has a beta of 0.8. The yield on...Ch. 9 - Prob. 7PCh. 9 - David Ortiz Motors has a target capital structure...Ch. 9 - Prob. 9PCh. 9 - The earnings, dividends, and stock price of Shelby...Ch. 9 - Radon Homes’ current EPS is $6.50. It was $4.42 5...Ch. 9 - Spencer Supply’s stock is currently selling for...Ch. 9 - Prob. 13PCh. 9 - Prob. 14PCh. 9 - Prob. 15PCh. 9 - Suppose the Schoof Company has this book value...Ch. 9 - Prob. 1MCCh. 9 - Prob. 2MCCh. 9 - Prob. 3MCCh. 9 - Prob. 4MCCh. 9 - Prob. 5MCCh. 9 - Prob. 6MCCh. 9 - Prob. 7MCCh. 9 - Prob. 8MCCh. 9 - Prob. 9MCCh. 9 - Prob. 10MCCh. 9 - Prob. 11MCCh. 9 - Prob. 12MCCh. 9 - Prob. 13MCCh. 9 - Prob. 14MCCh. 9 - Prob. 15MCCh. 9 - Prob. 16MC
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY