Question
Following three problems Current Total assets $3,000,000,000 Tax rate 25% Operating income (EBIT) $8,000,000,000 Debt ratio 0% Interest expense $0 WACC 10% Net income $480,000,000
| Following three problems | |||||
| Current | Total assets | $3,000,000,000 | Tax rate | 25% | |
| Operating income (EBIT) | $8,000,000,000 | Debt ratio | 0% | ||
| Interest expense | $0 | WACC | 10% | ||
| Net income | $480,000,000 | M/B ratio | 1.00× | ||
| Share price | $32.00 | EPS | $3.20 | ||
| Estimated growth rate | 0% | ||||
| Dividend payout ratio | 100% | ||||
After going through extensive analysis, the company has decided to target 30% debt and 70% equity based on market values. This strategy is expected to increase the cost of equity to 13%, assuming the pre-tax cost of debt 7%.
What is the target WACC?
What is the target firm value?
Do you agree with this target capital structure strategy as a more optimal capital structure? explain
Positive Ratings will be given
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Financial Reporting Financial Statement Analysis and Valuation
Authors: Clyde P. Stickney
6th edition
324302959, 978-0324302967, 324302967, 978-0324302950
