What is the firm wacc and total corporate value

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Question - A 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 $13.24 million, and its tax rate is 15%. The company can change its capital structure by either increasing its debt to 70%, or decreasing its debt to 30%.  If it decides to increase its use of financial leverage, it must call its old bonds and issue new bonds with a 12% coupon. If it decides to decrease its financial 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, rs is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure?

Reference no: EM133123710

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