outstanding and no debt. The stock sells for $64 per share, but the book value per share is $19. Net income is currently $11.5 million. The new facility will cost $30 million, and it will increase net income by $675,000. a. Assuming a constant price-earnings ratio, what will the effect be of issuing new equity to finance the investment? To answer, calculate the new book value per share, the new total earnings, the new EPS, the new stock price, and the new market-to-book ratio. What is going on here? b. What would the new net income for the company have to be for the stock price to remain unchanged?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![9. Dilution [LO3] Wayne, Inc., wishes to expand its
facilities. The company currently has 6 million shares](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa67834ee-0fdf-4424-b804-68a4c92cb763%2Ff6bba6d5-d483-4aea-b8f1-9349f873a854%2Foyf7toq_processed.png&w=3840&q=75)
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