Winters Company has the financial information down below.

Asset is $3,000,000 (),  which means your book equity value equals your market equity value

Current stock price is $15,  and has 150,000 number of shares outstanding

However, the firm is  considering selling bonds to increase its debt level. If it moves to a capital  structure with 70% debt based on market values, to reflect the  increased risk. In other words, the bondholders demand a higher return to  compensate the higher leverage risk. Current r_d = 6 %, new  r_d from the new additional bond sales = 9 %.

The current beta of the  company (b_L) is 1.4

EBIT is $260,000

This company EBIT has a current  constant growth of 3.5%, and payout 40% of its earnings as  dividend. However, once it gets more capital from the new debt that it plans to  raise, the new constant growth rate will be 8.7% because it will deploy  this new capital to generate a higher growth rate for the company.

Tax rate is 25%, r_M  = 10% and r_F is 4%

 

            a)  What is the current debt value? Weight of  Debt in %? Hint: You know the equity value and the asset value from the given  information, so you can find the debt value. 

            b) What is the WACC  before the change in capital structure?

            c)  What is the new WACC after the change in  capital structure?

            d)  Find the intrinsic value of the firm before  the change and what should be the intrinsic stock price. Why is the price per  share trading in the market different from your calculated intrinsic stock  price?

            e)  Find the intrinsic value of the firm after  the change and what could be the intrinsic stock price, which can translate to  the market stock price.

            f)  Should the firm go ahead with the change? How  much does it affect the stock price in %?

Answer rating: 100% (QA)

Answer a To find the current debt value we can subtract the equity value from the asset value Debt Value Asset Value Equity Value Since the book equity value equals the market equity value the equity ... View the full answer