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 80.0% 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 9.0%.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 - T)because no new operating capital is needed,and then divide by (WACC - g).Do not round your intermediate calculations.
A) $7,143
B) $8,000
C) $7,357
D) $5,357
E) $5,929

Question

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 80.0% 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 9.0%.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 - T)because no new operating capital is needed,and then divide by (WACC - g).Do not round your intermediate calculations.  ​
A) $7,143 
B) $8,000 
C) $7,357 
D) $5,357 
E) $5,929

Quizplus · Accepted Answer

The Answer of 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 80.0% 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 9.0%.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 - T)because no new operating capital is needed,and then divide by (WACC - g).Do not round your intermediate calculations.  ​
A) $7,143 
B) $8,000 
C) $7,357 
D) $5,357 
E) $5,929

As a Consultant to First Responder Inc