On January 1 , 2009 the total assets of the Shipley Company were $ 180 million.During...

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Finance

On January 1 , 2009 the total assets of the Shipley Company were$ 180 million.During the year, the company plans to raise andinvest $ 90 million.The firm’s present capital structure isconsidered optimal.Assume that there is no short term debt.
          Long termdebt                                90,000,000
          CommonEquity                               90,000,000
          Total Liabilities andEquity            180,000,000
New bonds will have a coupon rate of 10% and will sell at par.Common stock,currently selling at $ 40 a share can be sold to netthe company at$36 a share. Stockholders’ required rate of return is12%.( The next expected dividend is $1.60). Retained earnings areestimated to be $9 million.The tax rate is 40%.
       a.To maintain the presentcapital structure, how much of the capital budget must
          Shipley finance by equity?
       b.How much of the newequity funds needed must be generated
         internally?Externally?
       c.Calculate the cost ofeach of the equity components.
       d.Calculate the weightedaverage cost of capital.

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4.1 Ratings (724 Votes)

The present Debt to equity ratio 90000000 9000000011 a So 90 mln50 45 mlnshould be financed by Equity Balance 9045 45000000 should be the total equity b Current retained earnings in the total common equity 9000000 so common equity See Answer

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On January 1 , 2009 the total assets of the Shipley Company were$ 180 million.During the year, the company plans to raise andinvest $ 90 million.The firm’s present capital structure isconsidered optimal.Assume that there is no short term debt. Long termdebt 90,000,000 CommonEquity 90,000,000 Total Liabilities andEquity 180,000,000New bonds will have a coupon rate of 10% and will sell at par.Common stock,currently selling at $ 40 a share can be sold to netthe company at$36 a share. Stockholders’ required rate of return is12%.( The next expected dividend is $1.60). Retained earnings areestimated to be $9 million.The tax rate is 40%. a.To maintain the presentcapital structure, how much of the capital budget must Shipley finance by equity? b.How much of the newequity funds needed must be generated internally?Externally? c.Calculate the cost ofeach of the equity components. d.Calculate the weightedaverage cost of capital.