Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $11.16 million, and its tax rate is 30%. Pettit can change its capital structure by either increasing its debt to 55% (based on market values) or decreasing it to 45%. If it decides toincreaseits use of leverage, it must call its old bonds and issue new ones with a 11% coupon. If it decides todecreaseits leverage, it will call its old bonds and replace them with new 9% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.

The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rswill be 16%. If it decreases leverage, rswill be 13%.

Present situation (50% debt):

What is the firm's WACC? Do not round intermediate calculations. Round your answer to three decimal places.

%

What is the total corporate value? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

$million

55% debt:

What is the firm's WACC? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the total corporate value? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

$million

45% debt:

What is the firm's WACC? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the total corporate value? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

$million

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Investments Valuation and Management

Authors: Bradford Jordan, Thomas Miller

7th edition

978-0078096785, 78096782, 978-0077861636, 77861639, 978-0078115660

More Books

Students also viewed these Finance questions

Question

Where does the person work?

Answered: 1 week ago