As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 20.0% debt would cause the cost of equity to increase from 10.0% to 12.0%, and the interest rate on the new debt would be 8.0%. What would the firm’s total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 %u2013 T) because no new operating capital is needed, and then divide by (WACC %u2013 g).
Oper. income (EBIT) $800 Tax rate 40.0% New cost of equity (rs) 12.00% New debt ratio 20.0% Interest rate (rd) 8.00%
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