Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling

Question:

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10 percent perpetual bonds now selling at par. The company’s EBIT is $13.24 million, and its tax rate is 15 percent. Pettit can change its capital structure by either increasing its debt to 70 percent (based on market values) or decreasing it to 30 percent. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12 percent coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 8 percent coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.

The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, rs, is 14 percent. If it increases leverage, rs will be 16 percent. If it decreases leverage, rs will be 13 percent. What is the firm’s WACC and total corporate value under each capital structure?

Bonds
When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...