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 − T)because no new operating capital is needed,and then divide by (WACC − g).

A)$2,982
B)$3,314
C)$3,682
D)$4,091
E)$4,545

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 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 − T) because no new operating capital is needed,and then divide by (WACC − g) .

A)$2,982 
B)$3,314 
C)$3,682 
D)$4,091 
E)$4,545

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 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 − T)because no new operating capital is needed,and then divide by (WACC − g).

A)$2,982 
B)$3,314 
C)$3,682 
D)$4,091 
E)$4,545

As a Consultant to First Responder Inc