As a consultant to First Responder Inc., you have obtained the following data (d

Question

As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 55.0% debt would cause the cost of equity to increase from 10.0% to 13.0%, and the interest rate on the new debt would be 8.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g).


Oper. income (EBIT) $800 Tax rate 40.0%
New cost of equity (rs) 13.00% New 55.0%
Interest rate (rd) 8.00%

Explanation / Answer

wacc = 55%*13% + 45%*8%*(1-40%)= 9.31%

total market value = 800*(1-40%)/(9.31%-0)=$5,155.75

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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