I'm not taking Accounting now. But i will be taking it in Fall. This is just for my presonal learning
<br>1. In order to maintain the present capital structure, how much of the new capital must be financed by equity (common & retained earnings).
<br>First we find out the total funding need.
<br>Additional funding required is $20 million.
<br>Secondly, as the current capital structure is optimal, we only have to replicate it. So, we find what percentage of the current capital structure is equity (common & retained earning). This is (30+20)/(25+25+30+20) or 0.5.
<br>Hence, half of the additional funding need will be financed by equity, which is 0.5*20 or $10 million
<br>2. How much of the equity financing must come from the sale of new common stock?
<br>We calculated in part 1 that $10 million will be financed by equity (common and retained earnings).
<br>We are supposed to maintain the same capital structure, so the question boils down to, how do we preserve the same ratio as we previously had?
<br>The ratio (common stock/equity) before and after financing must be the same. Hence,
<br>30/(20+ 30) = x/10
<br>Or x = $6 million. This amount must be financed by the sale of new common stock.
<br>3. What is Caribbean's weighted average cost capital?
<br>What is the total amount before financing that is raised from the capital market?
<br>The amount is = Debt + Preferred Stock + Common Stock = 25+25+30 or $80 million.
<br>As we are not changing the capital structure so ...