Question
Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million
Pettit Printing Company (PPC) 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 $11.74 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 65% (based on market values) or decreasing it to 35%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its 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.
PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure?
Do not round intermediate calculations. Enter your monetary answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answers to two decimal places.
| What is PCC'S WACC and corporate value under the initial capital structure (that is 50% leverage)? | Answer 1Choose...WACC = 11.99%; Vop = $85.62 millionWACC = 11.25%; Vop = $88.70 millionWACC = 11.13%; Vop = $89.68 million35% debt, 65% equityWACC = 12.23%; Vop = $81.60 millionWACC = 12.88%; Vop = $78.81 millionWACC = 10.91%; Vop = $94.56 million50% debt, 50% equity65% debt, 35% equity |
| What is PCC'S WACC and corporate value under if it increases its use of leverage (65% debt)? | Answer 2Choose...WACC = 11.99%; Vop = $85.62 millionWACC = 11.25%; Vop = $88.70 millionWACC = 11.13%; Vop = $89.68 million35% debt, 65% equityWACC = 12.23%; Vop = $81.60 millionWACC = 12.88%; Vop = $78.81 millionWACC = 10.91%; Vop = $94.56 million50% debt, 50% equity65% debt, 35% equity |
| What is PCC'S WACC and corporate value under if it decreases its use of leverage (35% debt)? | Answer 3Choose...WACC = 11.99%; Vop = $85.62 millionWACC = 11.25%; Vop = $88.70 millionWACC = 11.13%; Vop = $89.68 million35% debt, 65% equityWACC = 12.23%; Vop = $81.60 millionWACC = 12.88%; Vop = $78.81 millionWACC = 10.91%; Vop = $94.56 million50% debt, 50% equity65% debt, 35% equity |
| Based on your answer above, which capital structure should PCC choose? | Answer 4Choose...WACC = 11.99%; Vop = $85.62 millionWACC = 11.25%; Vop = $88.70 millionWACC = 11.13%; Vop = $89.68 million35% debt, 65% equityWACC = 12.23%; Vop = $81.60 millionWACC = 12.88%; Vop = $78.81 millionWACC = 10.91%; Vop = $94.56 million50% debt, 50% equity65% debt, 35% equity |
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