Question

Problem 16-9 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 $11.33 million, and its tax rate is 15%. Pettit can change its capital structure either by increasing its debt to 70% (based on market values) or decreasing it to 30%. 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 in its old bonds and replace them with new 7% 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, Is, is 14%. If it increases leverage, is 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 70% 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 30% 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

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 AA = = = Dr Wrap Text General Ea Copy Paste B I U D- -A E E E Merge & Center $ % &.. Conditional Format Format Painter Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells FC467 - for FR FS FT FU EV E W EXEY FA FB CASE 1 PRESENT SITUATION 468 DEBT = 50%, EQUITY = 50% ke = 14%, kd=10% EBIT = 11.33 Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select FC FD FE 467 469 WACC = k0 = We*ke + Wd*kd(1-t) WACC = (0.50)*(14%) + (0.50)*(10%)*(1-0.15)= 11.250% THEREFORE THE VALUE OF THE FIRM VALUE OF THE FIRM = EBIT (1-t)/WACC = 11.33*(1-0.15)/0.1125 = ANSWER: 85.604 85.604 CASE 2 DEBT = 70% DEBT = 70%, EQUITY = 30% ke = 16%, kd=13% 470 471 472 473 474 475 476 477 478 479 480 481 482 483 484 485 N Red WACC = k0 = We*ke+Wd*kd(1-t) WACC = (0.30)*(16%) + (0.70)*(13%)*(1-0.15)= 12.54% 76.829 THEREFORE THE VALUE OF THE FIRM VALUE OF THE FIRM = EBIT (1-t)/WACC = 11.33*(1-0.15)/0.1254 = ANSWER: 76.829 profit margin loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPONPER APR CPI H CAP STRU VALUE ear FVA LOAN OPTIONSpv, fv, annuity ferences - O pva 52 53 0 BO. 130% m * v 10 ...Rag ENG 01-11-2019

PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) Review View Add-Ins File Home Insert Page Layout Formulas Data - 2x % Cut Calibri 11 Dr General AA = = = A Wrap Text Merge & Center - anter BIU - D $ 5 -% , to the conditional Federasiya % , :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles E Copy Paste Format Painter Clipboard FC498 ER Find & Select Σ AutoSum : A Fill Z Sort & 2 Clear Filter Editing Font Alignment Number Cells fic ES EU EV E W EX (formula Bar EZ FA FB FC FD FE 487 488 489 CASE 3 DEBT = 30% ke = 13%, kd=7% 490 491 492 WACC = k0 = We*ke + Wd*kd(1-t) WACC = (0.70) *(13%) + (0.30) *(7%)*(1-0.15)= 493 10.885% 10.89% THEREFORE THE VALUE OF THE FIRM VALUE OF THE FIRM = EBIT (1-t)/WACC = 13.33*(1-0.15)/0.10885 = 88.475 494 495 496 497 498 499 500 ANSWER: 88.475 501 502 503 504 505 N Rea H CAP STRU VALUE profit margin loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPONPER APR CPI ear FVA LOAN OPTIONSpv, fv, annuity ferences pva 52 53 BOI 130% 0 0 S E O * K 10 ENG 01-11-2019