A consultant has collected the following information regarding Young Publishing: The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 11% and that the pre-tax cost of debt will be 10%. If the company makes this change, what would be the total market value (in millions) of the firm?
A) $3,200
B) $3,600
C) $4,000
D) $4,200
E) $4,800 Medium/Hard:

Question

A consultant has collected the following information regarding Young Publishing:  The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 11% and that the pre-tax cost of debt will be 10%. If the company makes this change, what would be the total market value (in millions) of the firm?
A) $3,200 
B) $3,600 
C) $4,000 
D) $4,200 
E) $4,800 Medium/Hard:

Quizplus · Accepted Answer

The Answer of A consultant has collected the following information regarding Young Publishing:  The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 11% and that the pre-tax cost of debt will be 10%. If the company makes this change, what would be the total market value (in millions) of the firm?
A) $3,200 
B) $3,600 
C) $4,000 
D) $4,200 
E) $4,800 Medium/Hard:

A Consultant Has Collected the Following Information Regarding Young Publishing