Reference no: EM131916829
1. The common stock and debt of Southern Technologies are valued at $50 million and $100 million, respectively. Investors currently require a 15% return on the common stock and a 5% return on the debt. Southern Technologies decides to issue an additional $25 million of common stock and uses this money to retire debt. Assume that the Modigliani-Miller (1958) theory holds so that there are no taxes and the change in the capital structure does not affect financial risk.
a. The unlevered cost of equity financing.
b. The cost of equity financing after the stock issue.
c. The value of the firm after the stock issue.
d. The WACC of the firm after the stock issue.
2. During 2009, Raines Umbrella Corp. had sales of $734,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $573,000, $94,000, and $131,000, respectively. In addition, the company had an interest expense of $95,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. paid out $16,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the firm's net new long-term debt?
$0 $44,000 $83,000 $67,450 $18,500
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