Total assets---- $3,000 million Tax rate------ 40% Operating income (EBIT)---$80
ID: 2673825 • Letter: T
Question
Total assets---- $3,000 million Tax rate------ 40%Operating income (EBIT)---$800 million Debt ratio----- 0%
Interest expense--- $0 million WACC---- 10%
Net income---- $480 million M/B ratio----- 1.00?
Share price---- $32.00 EPS = DPS----- $3.20
The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 11% and that the pre-tax cost of debt will be 10%. If the company makes this change, what would be the total market value (in millions) of the firm?
This was my answer but it didn't come out in millions but rather billions
20% Debt and 80%equity, 10% pre-tax cost of debt
[(.20)*(.10)*(1-.4)]+ (.8*(.11))= New WACC= .188= 18.8%
V= [FCF/ WACC]= [ EBIT(1-tax)/ (WACC)]
[800million(1-.40)]/ .188= [480million/.188]=
=$2,553,191,489 Billion is the market value of the
--Not sure where I went wrong--
How do I solve this problem
Explanation / Answer
correct answer = $4800 millions ============================================================================================================================================================================================= WACC -NEW = 0.2*0.1*(1-0.4) + 0.8*0.11 = 0.012 + 0.088 = 0.1 = 10% ============================================================================================================================================================================================= Value of the firm = FCF / WACC ============================================================================================================================================================================================ = 800 million * (1-0.4) / 0.1 = 800 * 0.6 / 0.1 = 4,800 million --------correct answer -100% SURE
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.