Problem 9-15 WACC Estimation On January 1, the total market value of the Tyssela
ID: 2713169 • Letter: P
Question
Problem 9-15
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, shown below, is considered to be optimal. Assume that there is no short-term debt.
New bonds will have an 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 $1.20/$30 = 4%.) The marginal corporate tax rate is 40%.
In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000.
$
Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.
%
Explanation / Answer
to maintain the present capital structure, how much of the new investment must be financed by common equity? the answer is $15,000,000 how do I arrive at this number?
.Required Investments = $30,000,000
Since the total market value of the firm is $60,000,000
Out of that, $30,000,000 is financed through equity, then the weight of equity = $30,000,000 / $60,000,000
= 0.5
Common equity needed = Total Amount of Investment Weight of Equity
= 0.5($30,000,000)
= $15,000,000.
b. Assume there is sufficient cashflow so the co. can maintain its target capital structure w/o issuing additional shares of equity. what is the WACC? answer is 8.4%, how do I arrive at this number?
Cost of Equity =
=
= 0.12
= 12%
After Tax Cost of Debt = Before Tax Cost of Debt (1-Tax Rate)
= 8 (1-0.4)
= 4.8%
WACC = (Weight of Equity Cost of Equity) + (Weight of Debt After Tax Cost of Debt)
= (0.5 12%) + (0.5 4.8%)
= 8.4%