Tim Gillespie Week 5 Homework

Tim Gillespie Week 5 Homework - Tim Gillespie Week 5...

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Tim Gillespie Week 5 Homework Fin 440 Prob 10-15 Debt $30,000,000 Common Equity $30,000,000 Total Capital $60,000,000 A. To maintain the present capital structure, how much of the new investment must be financed by the common equity? Debt : Equity = 1 to 1 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? Prop of Debt = 0.5 Prop of Equity = 0.5 Cost of debt after taxes = 4.80% WACC = Prop of Debt * Cost of Debt + Prop of Equity * Cost of Equity WACC = 8.40% 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? With the debt to equity being equal, then with the funds required equaling $30 million this means that $15 million will be from the common equity and the other half from debt. With the prop of debt and equity both being .5 meaning each half, the WACC would equal 8.4%. As long as the capital structure maintains the same with the debt and equity being equal, then the WACC will remain the same. If either of the debt or equity amounts change, then the WACC would change respectively.
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This note was uploaded on 02/25/2012 for the course FINANCE 440 taught by Professor Jones during the Spring '12 term at Regis University.

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Tim Gillespie Week 5 Homework - Tim Gillespie Week 5...

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