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Question - The target capital structure of the Tysseland Company consists of $30 million in debt and $30 million in common equity. During the year, the company plans to raise and invest $10 million in new projects.
New bonds will have a 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The next expected annual dividend is $1.20, and the annual growth rate in dividends of 8% is expected to continue forever. The marginal corporate tax rate is 30%.
Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its
A) After -tax cost of debt?
B) Cost of equity?
C) WACC?
D) Now assume that Tysseland issues new shares and floatation costs are 10%. What is the new WACC?
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