Question
Gartner Systems has no debt and an equity cost of capital of 9.5%. Gartner's current market capitalization is $ 99 million, and its free cash
Gartner Systems has no debt and an equity cost of capital of 9.5%. Gartner's current market capitalization is
$ 99 million, and its free cash flows are expected to grow at 2.9 % per year. Gartner's corporate tax rate is
38 % Investors pay tax rates of 36 % on interest income and 19% on equity income.
a. Suppose Gartner adds $ 50 million in permanent debt and uses the proceeds to repurchase shares. What will Gartner's levered value be in this case?
b. Suppose instead Gartner decides to maintain a 50 % debt-to-value ratio going forward. If Gartner's debt cost of capital is 6.06 % what will Gartner's levered value be in this case?
Hint:Make sure to round all intermediate calculations to at least four decimal places.
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