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Question Workspace

The following information has been presented to you about the Gibson Corporation.

Total assets	$3,000 million		Tax rate	25%
Operating income (EBIT)	$800 million		Debt ratio	0%
Interest expense	$0 million		WACC	10%
Net income	$480 million		M/B ratio	1.00
Share price	$32.00		EPS = DPS	$3.20

The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 11% and that the pre-tax cost of debt will be 8%. If the company makes this change, what would be the total market value (in millions) of the firm?

a. $5,200

b. $6,000

c. $4,400

d. $4,800

e. $5,400