Question

Problem 15-9
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 $11.72 million, and its tax rate is 15%. 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 12% 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, r_s, is 14%. If it increases leverage, r_s will be 16%. If it decreases leverage, r_s 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

Answer 1

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

PV, FV, ANNUITY (Autosaved) Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins E AutoSum Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center Paste +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & Filter Select BIU % .00 0 Format Painter Clear Formatting as Table Styles Clipboard Number Editing Font Alignment Styles Cells fox FC507 FB FC ET FA ES EU EV EW EX EY EZ FD FE FF FG 505 506 PRESENT SITUATION CASE 1 EBIT 11.72 507 DEBT 50%, EQUITY 50% WACC k0 We*ke Wd*kd(1-t) WACC (0.50)*(14%) (0.50)*(10%)* (1-0.15)- ke 14%, kd =10% 508 509 11.250% 510 511 THEREFORE THE VALUE OF THE FIRM VALUE OF THE FIRM EBIT (1-t)/WACC 11.72*(1-0.15)/0.11250 512 88.551 513 514 ANSWER 88.551 515 DEBT 75% ke 16%, kd 12% 516 CASE 2 EQUITY 25% 517 k0 = We*ke + Wd*kd(1-t) 518 WACC WACC (0.25)* (16%) + (0.75)*(12%)* (1-0.15)= 11.65% 519 520 521 THEREFORE THE VALUE OF THE FIRM VALUE OF THE FIRM EBIT (1-t)/WACC 11.72*(1-0.15)/0.1165 = 522 85.511 523 524 ANSWER: 85.511 525 CAP STRU VALUE pv, fv, annuity loan with points profit margin ear FVA s3 LOAN OPTIONS LOCK BOX DILUTION DOLLAR COST AVG EXPO NPER APR CPI s2 pva Rea erences 120% WA 10:38 TENG 27-11-2019

PV, FV, ANNUITY (Autosaved) Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill Merge & Center Insert Delete Format Sort & Find & Filter Select Paste +.0 .00 Conditional Format Cell BIU % .00 0 Format Painter Clear Formatting as Table Styles Number Styles Editing Clipboard Font Alignment Cells fox FC536 FA ET FB FG ES EU EV EW EX EY EZ FC FD FE FF 526 527 DEBT 25% , EQUITY 75% ke 13%, kd =9% CASE 3 528 WACC k0 We ke Wd*kd(1-t) 529 WACC (0.75)*(13%) (0.25)*(9%)*(1-0.15)= 11.66% 530 531 532 THEREFORE THE VALUE OF THE FIRM VALUE OF THE FIRM EBIT (1-t)/WACC 11.72* (1-0.15)/0.1166= 533 85.419 534 535 ANSWER 85.419 536 537 538 539 540 541 542 543 544 545 546 pv, fv, annuity loan with points LOCK BOX DILUTION profit margin ear FVA s3 LOAN OPTIONS CAP STRU VALUE DOLLAR COST AVG EXPO NPER APR CPI S2 pva Rea erences 120% WA 10:41 TENG 27-11-2019