to First Responder Inc., you have obtained the following data (dollars in millions). ans to pay out all of its carnings as dividends, hence g-0. Also, no net new investment in operati zeded because growth is zero. The CFO believes that a move from zero debt to 20.0% debt would equity to increase from 10.0% to 12.0%, and the interest rate on the new debt would be 8.0%. W m's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT cause no new operating capital is needed, and then divide by (WACC - g). Do not round your int culations. r. income (EBIT) $800 Tax rate 25.0%

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
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As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company
plans to pay out all of its earnings as dividends, hence g-0. Also, no net new investment in operating capital is
needed because growth is zero. The CFO believes that a move from zero debt to 20.0% debt would cause the cost
of equity to increase from 10.0% to 12.0%, and the interest rate on the new debt would be 8.0%. What would the
firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT= EBIT(1-T)
because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate
calculations.
Oper. income (EBIT)
New cost of equity (r.)
Interest rate (ra)
$3,733
O $5,111
$4,400
$4,667
$5,556
$800
12.00%
8.00%
Tax rate
New wa
25.0%
20.0%
Transcribed Image Text:As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g-0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 20.0% debt would cause the cost of equity to increase from 10.0% to 12.0%, and the interest rate on the new debt would be 8.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT= EBIT(1-T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations. Oper. income (EBIT) New cost of equity (r.) Interest rate (ra) $3,733 O $5,111 $4,400 $4,667 $5,556 $800 12.00% 8.00% Tax rate New wa 25.0% 20.0%
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