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Problem 1 5 - 0 9 Capital Structure Analysis Pettit Printing Company has a total market value of $ 1 0 0 million, consisting of

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 $13.01 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, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases
leverage, rs 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 $1.2 million should be entered as 1.2, 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 $1.2 million should be entered as 1.2, 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 $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three
decimal places.
$
million
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