as a consultant to first responer inc. you have obtained the following data (dol

Question

as a consultant to first responer 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 operation cappital is needed because growth is zero. the cfo beliees that a move from zero debt to 20% debt would cause the cost of equity to increase from 10% to 12%, and the interest rate on the new debt would be 8%. 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%

new cost of equity 12%                                            new wd 20%

interest rate rd      8%

a. 2982

b. 3314

c. 3682

d. 4091

e. 4545

PLEASE SHOW ALL WORK!!!!

Explanation / Answer

WACC = 0.2 * 0.6 * 8 + 0.8 * 12 = 10.56%

ebit( 1 - t ) = 0.6 * 800 = 480

Hence Market value is 480 / 0.1056 = 4545

Hence

d) 4545

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