Reference no: EM132124491
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
- To maintain the present capital structure, how much capital budget must McCue finance by equity?
- How much of the new equity funds needed will be generated internally and externally?
- Calculate the cost of each of the equity components.
- Calculate WACC.