PLEASE SHOW ALL WORK.

The Perpetual Motion Machine (PMM) makes children's toys and it has survived the pandemic. The new CEO of PMM, Ms. Bickering, is considering a change in capital structure and you have been asked to help her out in estimating the effect on PMM's value, cost of capital, etc. PMM currently maintains a constant debt to value ratio of 25% for a rating of AAA. Ms. Bickering wants to maintain a debt to value ratio of 50%. You estimate this will lower its rating to A but still keep the possibility of financial distress remote and negligible. The estimated tax rate for PMM is 20%. Its estimated free cash flows next year is $90 million expected to grow at 2%. PMM's current weighted average cost of capital is 12%. You have gathered the following market information on ratings and average credit spreads for long term corporate bonds: Rattings AAA AA A Credit spread 50bp 100bp 150bp You also estimate the expected market risk premium to be 6% and the yield on long term US treasuries to be 5% Fill out the matrket value, beta and return balance sheets for PMM at the current and target capital structure. Provide super-brief explanations of why a number changes (if it does) as a result of the capital structure change (e.g., by MM-1). You can round to the nearest million for a dollar value and to the second decimal place for a rate of return. SHOW YOUR CALCULATIONS CLEARLY (if you want points). Assets U= PVTS = Liab. & Eq. D= E= Assets U= PVTS = Liab. & Eq. D= E= Current: Target: V= V= V= V= Liab. & Eq. BD = Current: Assets BU Brs = By = Liab. & Eq. Bp = BE Target: Assets BU Brs = By BE By = Assets Liab. & Eq. Assets Liab. & Eq. TU = ID= TU = TD Current: Target: ITS = TE= Prs = TE= rv = rv = Tv = rv = The Perpetual Motion Machine (PMM) makes children's toys and it has survived the pandemic. The new CEO of PMM, Ms. Bickering, is considering a change in capital structure and you have been asked to help her out in estimating the effect on PMM's value, cost of capital, etc. PMM currently maintains a constant debt to value ratio of 25% for a rating of AAA. Ms. Bickering wants to maintain a debt to value ratio of 50%. You estimate this will lower its rating to A but still keep the possibility of financial distress remote and negligible. The estimated tax rate for PMM is 20%. Its estimated free cash flows next year is $90 million expected to grow at 2%. PMM's current weighted average cost of capital is 12%. You have gathered the following market information on ratings and average credit spreads for long term corporate bonds: Rattings AAA AA A Credit spread 50bp 100bp 150bp You also estimate the expected market risk premium to be 6% and the yield on long term US treasuries to be 5% Fill out the matrket value, beta and return balance sheets for PMM at the current and target capital structure. Provide super-brief explanations of why a number changes (if it does) as a result of the capital structure change (e.g., by MM-1). You can round to the nearest million for a dollar value and to the second decimal place for a rate of return. SHOW YOUR CALCULATIONS CLEARLY (if you want points). Assets U= PVTS = Liab. & Eq. D= E= Assets U= PVTS = Liab. & Eq. D= E= Current: Target: V= V= V= V= Liab. & Eq. BD = Current: Assets BU Brs = By = Liab. & Eq. Bp = BE Target: Assets BU Brs = By BE By = Assets Liab. & Eq. Assets Liab. & Eq. TU = ID= TU = TD Current: Target: ITS = TE= Prs = TE= rv = rv = Tv = rv =