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