eBook Problem Walk$-$Through

Capital Structure Analysis

Pettit Printing Company has a total market value of $$100$ million, consisting of $1$ million shares selling for $$50$ per share and $$50$ million of $10\%$ perpetual bonds now selling at par. The company's EBIT is $$10\mathrm{.}03$ million, and its tax rate is $20\%.$ Pettit can change its capital structure by either increasing its debt to $75\%($based on market values$)$ or decreasing it to $25\%.$ If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a $14\%$ coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new $9\%$ 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 $14\%.$ If it increases leverage, rs will be $16\%.$ If it decreases leverage, rs will be $13\%.$

Present situation $(50\%$ debt$)$:

What is the firm's WACC? Do not round intermediate calculations. Round your answer to three decimal places.

$11\mathrm{.}00$

$\%$

What is the total corporate value? Enter your answers in millions. For example, an answer of $$10,550,000$ should be entered as $10\mathrm{.}55.$ Do not round intermediate calculations. Round your answer to three decimal places.

$

$72\mathrm{.}800$

million

$75\%$ debt:

What is the firm's WACC? Do not round intermediate calculations. Round your answer to two decimal places.

$12\mathrm{.}40$

$\%$

What is the total corporate value? Enter your answers in millions. For example, an answer of $$10,550,000$ should be entered as $10\mathrm{.}55.$ Do not round intermediate calculations. Round your answer to three decimal places.

$

$64\mathrm{.}710$

million

$25\%$ debt:

What is the firm's WACC? Do not round intermediate calculations. Round your answer to two decimal places.

$11\mathrm{.}55$

$\%$

What is the total corporate value? Enter your answers in millions. For example, an answer of $$10,550,000$ should be entered as $10\mathrm{.}55.$ Do not round intermediate calculations. Round your answer to three decimal places.

$

$69\mathrm{.}472$

million