Question

On January 1, 2019, the total assets of the Dexter Company were $270 million. The firm's...

On January 1, 2019, the total assets of the Dexter Company were $270 million. The firm's present capital structure, which follows, is considered to be optimal. Assume that there is no short-term debt.

Long-term debt $135,000,000 Common equity $135,000,000

New bonds will have a 10 percent coupon rate and will be sold at par. Common stock, 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 percent., consisting of a dividend yield of 4 percent and an expected growth rate of 8 percent. (The next expected dividend is $2.40, so $2.40/$60 = 4%.) Retained earnings are estimated to be $13.50 million. The marginal tax rate is 40 percent. Assuming that all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation is $135 million. The marginal tax rate is 40 percent. Assuming that all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation is $135 million.

To maintain the present capital structure, how much of the capital budget must Dexter finance by equity?

How much of the new equity funds needed will be generated internally? Externally?

Calculate the cost of each of the equity components

At what level of capital expenditure will there be a break in Dexter’s Marginal Cost of Capital schedule?

Calculate WACC.

Homework Answers

Answer #1

Answer :-

a.      Common equity needed: 0.50($135,000,000) = $67,500,000.

b.      Expected internally generated equity (retained earnings) is $13.5 million. External equity needed is as follows:

   New equity needed $67,500,000    Retained earnings    13,500,000

       External equity needed    $54,000,000

c.      Cost of equity:

ks    = Cost of retained earnings

= Dividend yield + Growth rate = 12% = 4% + 8% = 12%.

= /P0 + g = $2.40/$60 + 0.08 = 0.04 + 0.12 = 12.0%.

ke   = Cost of new equity

= /NP + g = $2.40/$54.00 + 0.08 = 0.044 + 0.08 = 0.124 = 12.4%.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Please show steps On January 1, 2019, the total assets of the McGarvey Company were $270...
Please show steps On January 1, 2019, the total assets of the McGarvey 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...
On January 1, the total market value of the Tysseland Company was $60 million. During the...
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, here below, is considered to be optimal. 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 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share....
WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million....
WACC Estimation 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, here below, is considered to be optimal. 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...
On January 1, the total market value of the Tysseland Company was $60 million. During the...
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 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30...
ABC Inc. has total asset of $10 million, net working capital of $1 million. Owner's equity...
ABC Inc. has total asset of $10 million, net working capital of $1 million. Owner's equity is $5 million, long term debt is $2 million. The value of its current assets is $ _____ million?
2. A 7% semiannual coupon bond matures in 8 years. The bond has a face value...
2. A 7% semiannual coupon bond matures in 8 years. The bond has a face value of $1,000 and is currently trading at $1,104. Calculate the bond’s YTM. 3. Four years earlier, Janice purchased a $1,000 face value corporate bond with a 6% annual coupon, and maturing in 10 years. At the time of the purchase, it had an expected yield to maturity of 8.76%. If Janice sold the bond today for $1,088.39, what rate of return would she have...
On January 1, 2019, the Company has UCC balances for its tangible assets as follows: Class...
On January 1, 2019, the Company has UCC balances for its tangible assets as follows: Class 8                           575,000 Class 10                        45,000 Class 13                        68,000 There are no dispositions of Class 8 assets during the year. However, there are acquisitions in the total amount of $126,000. As the Company has decided to lease all of its vehicles in the future, all of the assets in Class 10 are sold during the year. The capital cost of these assets was $93,000...
Problem 9-15 WACC Estimation On January 1, the total market value of the Tysseland Company was...
Problem 9-15 WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $20 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 $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 10% coupon rate, and they will be sold at par. Common stock is currently selling...
1. Standard, Inc. reported EBIT of $57.00 million for last year. Depreciation expense totaled $20 million...
1. Standard, Inc. reported EBIT of $57.00 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $7 million. The company increased net working capital by $2 million. Free cash flow is expected to grow at a rate of 5.30% for the foreseeable future. Standard faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Standard's equity beta is 1.24, the risk-free rate is currently...
A consultant has collected the following information regarding Young Publishing: Total assets            $3,000 million               &
A consultant has collected the following information regarding Young Publishing: Total assets            $3,000 million                                Tax rate                                40% Operating income (EBIT)              $800 million         Debt ratio                              0% Interest expense                             $0 million        WACC                                   10% Net income                                        $480 million          M/B ratio                                1.00× Share price                                         $32.00                 EPS = DPS                            $3.20 The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company...