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 10%…

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 10% perpetual bonds now selling at par. The company’s EBIT is $13.24 million ad it’s tax rate is 15%. Petit 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 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. The firm pays out all earnings as dividends hence its stock is a zero growth stock. It’s 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 WACC, and total corporate value under each capital structure?

ParticualrsDebtEquityWACCEarnigs after taxValue of firmEAT/wacc Calculation of WACC and EBIT value of firmExistingIf debt is increasedIf debt is decreasedAmountWeightCost of…

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