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 (rs) | 12.00% | New wd | 80.0% | |
| Interest rate (rd) | 9.00% | |||
| a. | $5,929 | |
| b. | $7,143 | |
| c. | $7,357 | |
| d. | $8,000 | |
| e. | $5,357 |
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Microfinance Handbook An Institutional And Financial Perspective
Authors: Joanna Ledgerwood
1st Edition
0821343068, 978-0821343067
