On January 1, the total market value of the Tysseland Company was $60 million. During the year, the
company plans to raise and invest $10 million in new projects. The firm's present market value capital
structure, here below, is considered to be optimal. There is no short-term debt.
Debt
Common equity
Total capital
$30,000,000
30,000,000
$60,000,000
New bonds will have an 8% 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 the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%.
a. In order to maintain the present capital structure, how much of the new investment must be
financed by common equity? Round your answer to the nearest dollar.
$
b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital structure without
issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.
%