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"On January 1, the total market value of Bravo Company was $60 million. During the upcoming year, Bravo plans to raise and invest $30 million in...

This question was answered on May 08, 2010. View the Answer
"On January 1, the total market value of Bravo Company was $60 million. During the upcoming year, Bravo 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. New common stock, currently selling at $30 a share, can be sold to net the company $27 a 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 $1.20. Retained earnings for the year are estimated to be $3 million. The marginal corporate tax rate is 40 percent. Assume no depreciation cash flows are present.

a. In order to maintain the present capital structure, how much (in dollars) of the new investment must be financed by common equity?

b. How much (in dollars) of the needed new common equity funds must be generated externally?

c. Calculate the cost of each of the common equity components.

d. Calculate the firm's WACC using only retained earnings.

e. At what level of capital expenditures will the firm's WACC increase?

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"On January 1, the total market value of Bravo Company was $60 million. During the
upcoming year, Bravo plans to raise and invest $30 million in new projects. The firm's
present market value...

This question was asked on May 08, 2010 and answered on May 08, 2010.

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