FI516_Homework2_BrianLin - Brian Lin D01278742 Week 2...

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Brian Lin D01278742 Week 2 Homework Chapter 15 Questions Problem 15-9 Pettit Printing Company has a total market value of $100M, consisting of 1M shares selling for $50/share and $50M of 10% perpetual bonds now selling at par. The company’s EBIT is $13.24M, and its tax rate is 15%. Pettit can change its capital structure either by increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% 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, r s , is 14%. If it increases leverage, r s will be 16%. If it decreases leverage, r s will be 13%. What is the firm’s WACC and total corporate value under each capital structure? NOPAT = EBIT(1-T) NOPAT = $13.24M(1-15%) NOPAT = $13.24M(85%) NOPAT = $11.25M Zero Growth => FCF = NOPAT Current Capital Structure = 50% debt (w d = 50/100 = 50%) and 50% equity (w s = 50/100 = 50%) WACC = 50%(1-15%)(10%) + (50%)(14%)
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This note was uploaded on 10/13/2011 for the course MAFM FI516 taught by Professor Anthonycriniti during the Spring '10 term at Keller Graduate School of Management.

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FI516_Homework2_BrianLin - Brian Lin D01278742 Week 2...

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