Question
As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its
As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 80.0% debt would cause the cost of equity to increase from 10.0% to 12.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations.
| Oper. income (EBIT) | $800 | | Tax rate | 40.0% |
| New cost of equity (r s ) | 12.00% | | New w d | 80.0% |
| Interest rate (r d ) | 9.00% | | | |
| | a. | $5,929 |
| | b. | $7,143 |
| | c. | $7,357 |
| | d. | $8,000 |
| | e. | $5,357 |
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Accounting concepts and applications
Authors: Albrecht Stice, Stice Swain
11th Edition
978-0538750196, 538745487, 538750197, 978-0538745482
