Problem $15-09$

Capital Structure Analysis

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 $$13\mathrm{.}01$ million, and its tax rate is $15\%.$ 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 to increase its use of leverage, it must call its old bonds and issue new ones with a $13\%$ coupon. If it decides to decrease its leverage, it will

call its old bonds and replace them with new $8\%$ 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, $r_s,$ is $14\%.$ If it increases leverage, $r_s$ will be $16\%.$ If it decreases

leverage, $r_s$ will be $13\%.$

Present situation $(50\%$ debt$)$:

What is the firm's WACC? Round your answer to three decimal places.

$\%$

What is the total corporate value? Enter your answer in millions. For example, an answer of $$1\mathrm{.}2$ million should be entered as $1\mathrm{.}2,$ not $1,200,000.$ Round your answer to three

decimal places.

$ million

$55\%$ debt:

What is the firm's WACC? Round your answer to two decimal places.

$\%$

What is the total corporate value? Enter your answer in millions. For example, an answer of $$1\mathrm{.}2$ million should be entered as $1\mathrm{.}2,$ not $1,200,000.$ Round your answer to three

decimal places.

$

million

$45\%$ debt:

What is the firm's WACC? Round your answer to two decimal places.

$\%$

What is the total corporate value? Enter your answer in millions. For example, an answer of $$1\mathrm{.}2$ million should be entered as $1\mathrm{.}2,$ not $1,200,000.$ Round your answer to three

decimal places.

$

million