Question

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 $13.95 million, and its tax rate is 40%. Pettit can change its capital structure by either increasing its debt to 55% (based on market values or decreasing it to 45%. 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 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, 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? Do not round intermediate calculations. Round your answer to three decimal places. % What is the total corporate value? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places. $ million 55% debt: What is the firm's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % What is the total corporate value? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places. million 45% debt: What is the firm's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % What is the total corporate value? Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places. million "

Answer 1

Answer 50 millum & 1 million shares selling @ 50$ - $ 50 millen of lol. Bonds EBIT = $13.95 milion Tax = 40v. 2012 firm WACC WACC= kx Wa tb ke as we © & istory WACC - 10“). (1-407.2008. $0 Et? 4%. (x) 0.50 € 100 3.1 to 71 - 10% of Capital Sbuchure Changes to 557 Debt 8 457 Equity new bands Issued) I WACC = 0.55 (x2 13%. (1-40% As 0.45(x )6% loo 4.29% (to 7.204 = (11.49%. 6 f capital Structure changes to to. Debt 8 587 Equity WACC Ho 0.457. (x2 134 = 0.45 (x) 7%(1-40%) To 1.897. () $.457. ( 7.74.7 Scanned with CamScanner

Anoces value of company & Calree of Equity et Value of acht Existing value = 50 & million ( 5o & million Too & million of capital structure goes to STA Debt 8 452 Equity Dent Value = 55 $ million (p) 45 & milion __ = 100 millionai of capital forecture goes to 459. Debt 855/Equity t Debt f Value z 458 million & 55 $1 million in Scanned with mer