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# Total Market Value of the Firm

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I am a consultant and I have collected the following information regarding a Publishing Company:

Total Assets \$3,000 Million Tax Rate 40%
Opearting Income (EBIT) \$800 Million Debt Ratio 0%
Interest Expense \$0 Million WACC 10%
Net income \$480 Million M/B Ratio \$1.00H
Share Price \$32.00 EPS = DPS \$3.20

The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS).

I believe as a Consultant if the company move to a capital structure financed with 20 percent debt and 80 percent equity (based on market values) that the cost of equity will increase to 11 percent and that the pre-tax cost of debt will be 10 percent.

If the company makes this change, what would be the total market value of firm?

#### Solution Preview

Calculate WACC
Step 1: Calculate the after tax cost of debt

Marginal Tax rate T = 40% (Corporate Tax Rate)
Pre tax cost of debt= kd= 10.00% (Yield to maturity)
After tax cost of ...

#### Solution Summary

The solution calculates the market value of the firm by first calculating the WACC

\$2.19