Question
Gartner Systems has no debt and an equity cost of capital of 9.1%. Gartner's current market capitalization is $103 million, and its free cash flows
Gartner Systems has no debt and an equity cost of capital of 9.1%.
Gartner's current market capitalization is $103
million, and its free cash flows are expected to grow at 2.7% per year. Gartner's corporate tax rate is 35%. Investors pay tax rates of 37%
on interest income and 18%on equity income.
a. Suppose Gartner adds $49 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 7.18%, 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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