Business, 17.04.2020 23:56 Superman2934

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 $10.90 million, and its tax rate is 25%. 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 12% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 9% 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 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.

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Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares sel...