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Capital Structure Analysis – Recap

Forums › ACCA Forums › ACCA FM Financial Management Forums › Capital Structure Analysis – Recap

  • This topic has 0 replies, 1 voice, and was last updated 11 years ago by Anna.
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  • December 6, 2013 at 8:51 am #150958
    Anna
    Member
    • Topics: 2
    • Replies: 0
    • ☆

    Hello!
    I would be truly grateful for the help with this problem also.

    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 value. The firm’s EBIT is $13.24 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of financial leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its financial leverage, it will call in its old bonds and replace them with new 8% coupon bonds. The firm will sell or repurchase stock at its new equilibrium price to complete the capital structure change.

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

    Calculate the firm’s WACC and total corporate value under each capital structure.

    I have correctly calculated WACC – please, take a look at the data below. But I can’t come up with the Corporate Value. What would be a correct approach?
    Thank you!

    DEBT
    Original 0.7 0.3
    Value 100,000,000.00
    Price per share 50.00
    Number of shares 1,000,000.00
    Debt 50,000,000.00
    Rd 0.10 0.12 0.08
    Rs 0.14 0.16 0.13
    EBIT 13,240,000.00
    Tax 0.15
    WACC 0.1125 0.1194 0.1114

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