Pettit Printing Company has a total market value of $100 million, consisting of

Question

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 $14.77 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 75% (based on market values) or decreasing it to 25%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 11% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 9% 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

75% 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

25% 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

Explanation / Answer

EBIT => 14.77 M

NOPAT => 14.77 - 35% => $9.601 M

Answer 1

Weigh of Debt => 50 /100 => 50%

Weight of Equity => 50%

WACC => (10% - 35%) *50% + 14% * 50%

WACC => 10.25%

Answer 2

Coporate Value => 9.601 / 10.25%

Coporate Value => $93.668 M

Answer 3 (75% Debt)

WACC =>  (11% - 35%) *75% + 16% * 25%

WACC => 9.36%

Answer 4

Corporate Value => 9.601 / 9.36%

Corporate Value => $ 102.575 M

Answer 5 (25%)

WACC =>  (9% - 35%) *25% + 13% * 75%

WACC => 11.21%

Answer 6

Corporate Value => 9.601 / 11.21%

Corporate Value => $ 85.647 M

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