Question # 1

As a consultant to 1st Responders Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 75.0% debt would cause the cost of equity to increase from 10.0% to 13.0%, and the interest rate on the new debt would be 8.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations.

Oper. income (EBIT)	$900		Tax rate	25.0%
New cost of equity (rs)	13.00%		New wd	75.0%
Interest rate (rd)	8.00%

a. $7,297 million

b. $9,730 million

c. $8,710 million

d. $8,000 million

e. $11,613 million