Question

the total assets of a Company were $270 million. The firm’s present capital structure, which follows, is considered to be optimal. Assume that the company has no short term debt.

Long-term debt $135,000,000

Common Equity $135,000,000

Total Liabilities and Equity $270,000,000

Now bonds will have a 10 percent coupon rate and will be sold at par. Common stock, which is currently selling at $60 per share, can be sold to net the company $54 per share. Stockholders’ required rate of return is estimated to be 12 percent, consisting of a dividend yield of 4 percent and an expected growth rate of 8 percent. The next expected dividend is $2.4; so $2.4/60=4%. Retained earnings are estimated to be $13.5 million. The marginal tax rate is 40%. NWA has determined that acceptable investment opportunities total $135 million.

1-To maintain the present capital structure, how much of the total investment opportunities must the company finance with equity?______________

2- How much of the new equity funds needed will be generated internally? and externally? Internally ______________ and externally ______________

3- Calculate the cost of retained earnings______________

4- Calculate the cost of new equity ______________

5- Calculate WACC1 ______________

6- Calculate WACC2 ______________

7- At what level of capital expenditure will a break occur in the companies marginal WACC or Marginal Cost of Capital ______________

8- What’s the appropriate WACC for the total investment opportunities of $135 million _________

PLEASE USE EXCEL FORMULAS AND SHOW ALL WORK!!!!!!

Answer 1

As per rules I am answering the first 4 subparts of the question

Q No
1	Present equity weight	50.00%
	Amount to be financed with equity	$67,500,000.00
2	Internally generated=Retained earnings	$13,500,000.00
	Externally generated equity	$54,000,000.00
3	Cost of retained earnings= D1/Price+g	12.00%
4	Cost of new equity = D1/Net price+ g	12.44%

WORKINGS