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On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 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 $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000. $ Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. % Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? I. rs and the WACC will increase due to the flotation costs of new equity. II. rs and the WACC will decrease due to the flotation costs of new equity. III. rs will increase and the WACC will decrease due to the flotation costs of new equity. IV. rs will decrease and the WACC will increase due to the flotation costs of new equity. V. rs and the WACC will not be affected by flotation costs of new equity.
Use the loanable funds approach to show the impact of the U.S. budget deficit on the world real interest rate, holding all else constant.
A hostile takeover is the main method of transferring ownership interest in a corporation. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. A corporation is a legal entity th..
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –10 percent, 17 percent, 22 percent, and 10 percent. What was the variance of Crash-n-Burn’s returns over this period? What was the standard ..
Champoux Hair Factory, Inc., has earnings before interest and taxes of $200,000.- Can Champoux pay the proposed dividend?- What is the maximum dividend per share that may be paid?
Epple and Romano (2002) describe theoretical evidence that school vouchers will lead to "cream-skimming," - How would you design a targeted voucher system that would lead to a reduced level of cream-skimming?
Stock X has an expected return of 0.11. It has a beta estimated at 0.8, a risk-free rate of 0.03 and a risk premium of 6.1. Its variance of returns is 0.0106. All returns here are expresed as decimals, not percentages. What is its coefficient of vari..
You can invest in a? risk-free technology that requires an upfront payment of $1.13 million and will provide a perpetual annual cash flow of $115,000.
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.2..
What is the company’s before-tax cost of debt, assuming they issue new debt? What is the company’s cost of retained earnings?
The Frisco Company just paid $2.20 as its annual dividend. The dividends have been increasing at a rate of 4% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock..
Motoguzzie exports large –engine motorcycles (greater than 700 cc) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $3,000,000 of merchandise from Motoguzzie, with payment due in six months. If Motoguzzi..
Redlands issued 20 year, $1,000 par value term bonds on January 1, 2010. The bonds had an 8% stated rate of interest.. On December 31, 2015 the market rate of interest is 8% on new bonds. What is the current market price if you decide to sell your bo..
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