Calculate the cost of each of the equity components

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On January 1,1998, the total assets of the McCue company were $270 million. The first present capital structure, which follows, is considered optimal. Assume that they have no short-term debt.

Long-term debt                    $135,000,000

Common Equity                    135,000,000

                                         _____________

Total Liabilities and Equity            $270,000,000

New bonds will have a 10% coupon rate and will be sold at par. Common stocks are currently selling at $60 a share, can be sold to net the company $54 a share. Stockholders required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected growth rate of 8% (the next expected dividend is $2.4 so $2.4/$60 = 4%). Retained earnings are estimated to be $15 million. The marginal corporate tax rate is 20%. Assuming that all asset expansion (Gross expenditure plus fixed assets plus related working capital) is included in the capital budget, the amount of the capital budget, ignoring depreciation, is 160,000,000

  1. To maintain the present capital structure, how much capital budget must McCue finance by equity?
  2. How much of the new equity funds needed will be generated internally and externally?
  3. Calculate the cost of each of the equity components.
  4. Calculate WACC.

Reference no: EM132120941

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