On January 1, 2009, Shipley Company's total assets were $180 million. During the year, the company plans to raise $90 million and invest. The current capital structure of the firm is considered optimal. Suppose there is no short-term debt.

Long-term debt 90,000,000

Core Capital 90,000,000

Total Liabilities and Equity 180.000.000

New bonds will have a coupon rate of 10% and will be sold at par. Common stock, which is currently selling at $40 per share, can be sold to net the company at $36 per share. The required rate of return for shareholders is 12% (the next expected dividend is $1.60). Retained earnings are estimated at $9 million. The tax rate is 40%.

a. How much of the capital budget should be used to maintain the existing capital structure?

Is Shipley financing with equity?

b. How much of the new capital funds needed should be created?

internally? externally?

c.Calculate the cost of each of the equity components.

d.Calculate the weighted average cost of capital.

Answer rating: 100% (QA)

a To maintain the existing capital structure Shipley Company needs to use an equal amount of debt an... View the full answer