WACC EstimationOn January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $20 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$30,000,000Common equity30,000,000Total capital$60,000,000 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 the dividend yield is $1.20/$30 = 4%.) The marginal 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 for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.%Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.I. rs will increase and the WACC will decrease due to the flotation costs of new equity.II. rs will decrease and the WACC will increase due to the flotation costs of new equity.III. rs and the WACC will not be affected by flotation costs of new equity.IV. rs and the WACC will increase due to the flotation costs of new equity.V. rs and the WACC will decrease due to the flotation costs of new equity. -Select- one above IIIIIIIVV

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Asked Sep 24, 2019
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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 $20 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 $30,000,000
Common equity 30,000,000
Total capital $60,000,000

 

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 the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%.

 

  1. 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.
    $  

  2. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.
    %

  3. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? No numbers are required to answer this question.
    I. rs will increase and the WACC will decrease due to the flotation costs of new equity.
    II. rs will decrease and the WACC will increase due to the flotation costs of new equity.
    III. rs and the WACC will not be affected by flotation costs of new equity.
    IV. rs and the WACC will increase due to the flotation costs of new equity.
    V. rs and the WACC will decrease due to the flotation costs of new equity.
    -Select- one above IIIIIIIVV
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Expert Answer

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Step 1

1

It is given that,

Equity is $30,000,000.

Debt is $30,000,000.

The amount of fund raised is $20,000,000.

The formula to calculate weight of equity is given below:

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Equity Weight of equity = Equity +Debt

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Step 2

Substitute $30,000,000 for equity and $30,000,000 for debt in the formula,

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$30,000,000 Weight of equity $30,000,000+$30,000,000 $30,000,000 $60,000,000 -50%

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Step 3

Since weight of equity is 50% and to maintain this capital structure, company should finance the 50% of funds...

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Amount financed by common equity $20,000,000x50% -$10,000, 000

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