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

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 32P

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