The Following Information Has Been Presented to You About the Gibson

question 95

Multiple Choice

The following information has been presented to you about the Gibson Corporation. $$\begin{array} { l c } \text { Total assets } & \$ 3,000 \text { millionTax rate } &25\%\\\text { Operating income (EB TT) } & \$ 800 \text { millionDebt ratio } &0\%\\\text { Interest expense } & \$ 0 \text { millionW } \mathrm { ACC } &10\%\\\text { Net income } & \$ 480 \text { millionM/B ratio } &1.00×\\\text { Share price } & \$ 32.00 \mathrm { EPS } = \text { DPS }&\$3.20\end{array}$$ 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 8%.If the company makes this change, what would be the total market value (in millions) of the firm?

• A) $4,400
• B) $4,800
• C) $5,200
• D) $5,400
• E) $6,000

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Definitions:

Regular Cash Dividend

is a fixed amount paid per share to shareholders, typically on a quarterly basis, from a company's earnings.

Residual Dividend Approach

A policy for setting a company's dividend payment, where the dividend paid is based on earnings minus funds the firm retains to finance the equity portion of its capital budget.

Debt-to-Equity Ratio

A ratio reflecting the comparative amounts of debt and equity used to finance a company’s assets.

Investment Needs

The amount of capital required to fund a project, purchase assets, or support operations within a business.