On January 1, the total market value of the Western Oil Co. was $100 million. During the

Question:

On January 1, the total market value of the Western Oil Co. was $100 million. During the year, the company plans to raise and invest $42 million in new projects. The firm's present market value debt-to-equity ratio is 1.8:1. Assume that there is no short-term debt. New bonds will have a 7% rate, and they will be sold at par. is currently selling at $50 a share. Shareholders' required rate of return consists of a yield of 2% and an expected constant growth rate of 6%. The corporate tax rate is 30%.
a. To maintain the present capital structure, how much of the new investment must be financed by common equity?
b. Assume that there is sufficient cash flow such that Western can maintain its target cap- ital structure without issuing additional shares of equity. What is the WACC?
c. Suppose now that there is not enough internal cash flow and that the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC? Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...