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 15.0% debt would cause the cost of equity to increase from 10.0% to 13.0%, and the interest rate on the new debt would be 7.0%. What would the firm's total market value be if it makes this change? Do not round your intermediate calculations.
Oper. income (EBIT) $800
Tax rate 40.0%
New cost of equity (rs) 13.00%
New wd 15.0%
Interest rate (rd) 7.00%
a. $4,110
b. $3,986
c. $4,397
d. $3,740
e. $3,616
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