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?© BrainMass Inc. brainmass.com June 3, 2020, 7:40 pm ad1c9bdddf
Please see the attached file.
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 ...
The solution calculates the market value of the firm by first calculating the WACC