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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?

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    Solution Preview

    Please see the attached file.
    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