Question

4. Timco shares are currently valued at 53 each. There are two million outstanding. Last year, the dividend was 2, but we expect it to grow at 8% forever. Net Income is expected to be 10 million. The firm uses 40% debt in their capital structure. They can borrow more at 4%. The tax rate is 35%. New shares can be sold for 6% flotation costs. Find the breakpoint and the WACC before and after. (9.47, .083, .0844).

Answer 1

(9.47, .083, .0844).

Step-by-step explanation:

Calculation for the breakpoint and the WACC before and after

First step is to find the dividend for the current year .

Dividend= 2*.08

Dividend = 2.16

Second step is to find the r/s

r/s = (2.16/53) + .08

r/s=0.0406+.08

r/s= .1206

Third step is to find the WACC

WACC = .4*.04 * .65 + .6*.1206

WACC= .0104 + .07236

WACC= .08276 Approximately 0.83

Fourth step is to find the New WACC

New WACC

P(n) = 53*.94 (1-6%)

P(n)= 49.82

P(n)=(2.16/49.82) + .08

P(n) = .1234

P(n)=.4*.04*.65 + .6*.1234

P(n)= .0104 + .07404

P(n)= .08444

P(n)=2*2.16 = 4.32

P(n)=10-4.32 = 5.68 million

P(n)=5.68/.6

P(n)= 9.466 approximately 9.47

Therefore the breakpoint and the WACC before and after will be (9.47, .083, .0844).