On January 1, 2014, the total assets of the NWA Company were $270 million. The ﬁrm’s present
capital structure, which follows, is considered to be optimal. Assume that NWA has no short term
debt. Long-term debt $135,000,000
Common Equity $135,000,000
Total Liabilities and Equity M Now bonds will have a 10 percent coupon rate and will be sold at par. Common stock, which is
currently selling at $60 per share, can be sold to net the company $54 per share. Stockholders’
required rate of return is estimated to be 12 percent, consisting of a dividend yield of 4 percent and
an expected growth rate of 8 percent. The next expected dividend is $2.4; so $2.4/60=4%. Retained
earnings are estimated to be $13.5 million. The marginal tax rate is 40%. NWA has determined that
acceptable investment opportunities total $135 million. 7- To maintain the present capital structure, how much of the total investment opportunities must
NWA ﬁnance with equity? 8- How much of the new equity funds needed will be generated internally? and externally?
Internally and externally 9- Calculate the cost of retained earnings 10- Calculate the cost of new equity 1 1- Calculate WACCl 12- Calculate WACCz 13- At what level of capital expenditure will a break occur in NWA marginal WACC or Marginal
Cost of Capital 14- What’s the appropriate WACC for the total investment opportunities of $135 million