Capital Structure Analysis Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 milli
Posted: Thu Apr 28, 2022 12:35 pm
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 $13.60 million, and its tax rate is 15%. Pettit
can change its capital structure by either increasing its debt to
60% (based on market values) or decreasing it to 40%. 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 8% 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 gL is
zero. 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? 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.
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 $13.60 million, and its tax rate is 15%. Pettit
can change its capital structure by either increasing its debt to
60% (based on market values) or decreasing it to 40%. 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 8% 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 gL is
zero. 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? 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.