A consultant has collected the following information regarding Young Publishing

Question

A consultant has collected the following information regarding Young Publishing

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 #215
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 percent debt and 80 percent equity (based on market values) that the cost of equity will increase to 11 percent and that the pre-tax cost of debt will be 10 percent. If the company makes this change, what would be the total market value of the firm? (The answers are in millions.)

Explanation / Answer

New WACC = 20%*10%*(1-40%) + 80%*11% =10.0% Value of the firm = EBIT*(1-t)/WACC = 800*(1-40%)/10% = $4,800 million

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.