Question

Pettit printing company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10 percent perpetual bonds now selling at par. the company's ebit is $13.24 million, and its tax rate is 15 percent. pettit can change its capital structure by either increasing its debt to 70 percent (base on market value) or decrease it to 30 percent. if its decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12 percent coupon. if it decides to decrease its leverage, it will call in its old bonds and replace them with new 8 percent coupon bonds. the company wills ell 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, rs; is 14 percent. if it increases leverage rs will be 16 percent. if it decreases leverage, rs will be 13 percent. what is the firm's wacc and total corporate value under each capital structure?

Answer 1

The weighted average cost of capital for the firm will be 11.25%.

How to calculate the WACC?

The weighted average cost of capital is the calculation of the cost of capital for a firm where each category of capital is weighted.

Here, the weighted average cost of capital will be:

= 0.5(10%)(1 - 15%) + 0.5(14%)

= 0.5(0.1)(0.85) + 0.5(0.14)

= 11.25%

The corporate value at 70% debt when WACC is 11.94% will be:

= (EBIT)(1 - T)/WACC

= (13.24)(1 - 0.15)/0.1194

= $94.26 million

The corporate value at 30% debt when WACC is 11.14% will be:

= (EBIT)(1 - T)/WACC

= (13.24)(1 - 0.15)/0.1114

= $101.02 million

Learn more about WACC on:

brainly.com/question/25566972

#SPJ1