On January 1, the total market

On January 1, the total market value of the Farrah
Fowler (FF) Company was $100 million. The firm’s present market value capital
structure, show below, is considered to be optimal. Assume that there is no
short-term debt

Debt = $30,000,000

Common Equity =
$70,000,000

Total capital =
$100,000,000

New bonds will have a
5.50 percent coupon rate and be sold at par (thus YTM = coupon rate). Common
stock is currently selling for $75 per share. Stockholders’ required rate of
return is estimated to be 12.0 percent consisting of a dividend yield of 5.0
percent and an expected growth rate of 7.0 percent. The marginal tax rate is
25.0 percent

a. What is the FF’s
market value capital structure? (2 points)

b. Assume that there is
sufficient cash flow such that FF can maintain its target capital structure
without issuing additional shares of equity. What is the WACC? (5 points)

C. Suppose now that
there is not enough internal cash flow and the firm must issue new shares of
stock. Qualitatively speaking (no computations required), what will happen to
the WACC (3 points

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On January 1, the total market

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 $30,000,000
Common equity 30,000,000
Total capital $60,000,000

New bonds will have an 10% 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? Write out your answers completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar.

  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.

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On January 1, the total market

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. 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 10% 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 30%.

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.
%

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?
-Select-IIIIIIIVVItem 3
I. rs and the WACC will increase due to the flotation costs of new equity.
II. rs and the WACC will decrease due to the flotation costs of new equity.
III. rs will increase and the WACC will decrease due to the flotation costs of new equity.
IV. rs will decrease and the WACC will increase due to the flotation costs of new equity.
V. rs and the WACC will not be affected by flotation costs of new equity.

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On January 1, the total market

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. 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 8 percent coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. Stockholders required rate of return is estimated to be 12 percent, consisting of a dividend yield of 4 percent and an expected constant growth rate of 8 percent. The marginal corporate tax rate is 40 percent.

a.To maintain the present capital structure, how much of the new investment must be financed by common equity?

b.Assume that there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity. What is the WACC?

c.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?

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On January 1, the total market

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. 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 6% 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%.
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 such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC?

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