Capital structure analysis

Assignment Help Financial Management

Reference no: EM131451338

Capital Structure Analysis

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% perpetual bonds now selling at par. The company's EBIT is $14.70 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 65% (based on market values) or decreasing it to 35%. 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 in 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.

The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%.

Present situation (50% debt):

What is the firm's WACC? Round your answer to three decimal places. %

What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.

$ million

65% debt:

What is the firm's WACC? Round your answer to two decimal places. %

What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.

$ million

35% debt:

What is the firm's WACC? Round your answer to two decimal places.

What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.

$ million

Reference no: EM131451338

Questions Cloud

The bond makes semiannual coupon payments : Suppose you own a $1,000 face value bond issued by Fun Inc. with a coupon rate of 6% and a maturity of 12 years. The bond makes semiannual coupon payments.

What is woozless current share price : Suppose rather than reinvesting these earnings and grow, the firm plans to pay out all earnings as dividends. what is Woozles’s current share price?

Take the firm to turn over its inventory : How many days on average in 2016 did it take the firm to turn over its inventory?

Business and financial risk : Estimate the beta of an unlevered firm in the commuter airline business based on Jaxair's market-determined beta.

Capital structure analysis : What is the firm's WACC? What is the total corporate value? What is the total corporate value?

Determine the depreciation and book value for the hogs : Determine the depreciation and book value for the hogs for the first 3 years of ownership using the following depreciation methods.

What value would mm now estimate for each firm : What value would MM now estimate for each firm? Find SL, and then show that SL + D = VL results in the same value as obtained in part a.

The project will produce the same after-tax cash inflows : The project will produce the same after-tax cash inflows of 533,700 per year at the end of the year.

How much additional equity financing is required : If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

User Account

All Pages