A consultant has collected the following information regarding Young Publishing: Total assets $3,000 million Tax rate 40%
Question:
A consultant has collected the following information regarding Young Publishing:
Total assets $3,000 million
Tax rate 40% Operating income (EBIT) $800 million
Debt ratio 0% Interest expense $0 million
WACC 10% Net income $480 million
M/B ratio 1.00× 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). The consultant believes that if the company moves 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 the firm? (The answers are in millions.)
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