View the step-by-step solution to: Solutions: On January 1, the total market value of the Tysseland

Solutions: On January 1, the total marke...
Solutions: 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 $30000000 Common equity $30000000 Total capital $60000000. New bonds will have an 8 percent coupon rate, and they will be sold at per. Common stock is currently selling $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 next expected dividend is $1.20, so $1.20/$30=4%) The marginal corporate tax rate is 40 percent. To maintain the present capital structure, how much of the new investment must be financed by common equity.

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