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TOPIC - CAPITAL STRUCTURE ANALYSIS Petit printing company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of of 10% perpetual bonds now selling at par. The companys EBIT is $13.24 million and its tax rate is 15%. Pettit can change its capital structure either by increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and relace 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 is 14%. If it increases leverage, it will be 16%. If it decreases leverage it will be 13%. What is the firms WACC (WEIGHTED COST OF CAPITAL) and total corporate value under each capital structure?


Paper#7008 | Written in 18-Jul-2015

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