Capital Structure Analysis Pettit Printing Company (PPC) 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 $12.30 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 55 % ( based on market values) or decreasing it to 45%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 13% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 7% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. PPC expects no growth in its EBIT, so g, is zero. Its current cost of equity, rs, is 14%. If it increases leverage, r, will be 16%. If it decreases leverage, r, will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate calculations. Enter your monetary answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answers to three decimal places. WACC Total corporate value $ 50% debt % million $ 55% debt % million $ 45% debt % million
Capital Structure Analysis Pettit Printing Company (PPC) 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 $12.30 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 55 % ( based on market values) or decreasing it to 45%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 13% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 7% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. PPC expects no growth in its EBIT, so g, is zero. Its current cost of equity, rs, is 14%. If it increases leverage, r, will be 16%. If it decreases leverage, r, will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate calculations. Enter your monetary answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answers to three decimal places. WACC Total corporate value $ 50% debt % million $ 55% debt % million $ 45% debt % million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Transcribed Image Text:Capital Structure Analysis
Pettit Printing Company (PPC) 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 $12.30 million, and its tax rate is 15%. Pettit can change its capital structure by
either increasing its debt to 55% (based on market values) or decreasing it to 45%. If it decides to increase its use of leverage, it must call its
old bonds and issue new ones with a 13% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 7%
coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.
PPC expects no growth in its EBIT, so g, is zero. Its current cost of equity, rs, is 14%. If it increases leverage, r, will be 16%. If it decreases
leverage, r, will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate
calculations. Enter your monetary answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000.
Round your answers to three decimal places.
WACC
Total corporate value $
50% debt
%
million
$
55% debt
%
million
$
45% debt
%
million
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