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Calculate the cost of each of the equity components

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Reference no: EM133171482

Question - On 1 January 2021, the total assets of the ABC Ltd were $540 million. The company's present capital structure, provided below, is optimal. Assume that there is no short-term debt.

Non-Current Liability 

$ Values

Long-term debt  

$ 135,000,000

Ordinary equity 

$ 405,000,000

Total liabilities and Equity 

$ 540,000,000

New bonds will have a 10 per cent coupon rate and will be sold at par. Ordinary shares, currently selling at $72 a share, A new share will be sold to net return of $64 per share. Shareholders' required rate of return is estimated to be 12 per cent, consisting of a dividend yield of 4 per cent and an expected growth rate of 8 per cent. Retained earnings are estimated to be $102.5 million. The marginal tax rate is 40 per cent. If all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation, is $270 million.

1. To maintain the present capital structure, how much of the capital budget must ABC Ltd finance by equity?

2. How much of the new equity funds needed will be generated internally? How much externally?

3. Calculate the cost of each of the equity components.

4. Calculate the WACC before new equity issue and after new equity finance by the ABC Ltd.

The expected rate of return from the new capital investment is 10%, advise management whether to accept or reject the project.

Reference no: EM133171482

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