The Following Information Has Been Presented to You About the Gibson

question 7

Multiple Choice

The following information has been presented to you about the Gibson Corporation. $\begin{array}{lrlr}\text { Total assets } & \$ 3,000 \text { million } & \text { Tax rate } & 40 \% \\\text { Operating income (EBIT) } & \$ 800 \text { million } & \text { Debt ratio } & 0 \% \\\text { Interest expense } & \$ 0 \text { million } & \text { WACC } & 10 \% \\\text { Net income } & \$ 480 \text { million } & \text { M/B ratio } & 1.00 \times \\\text { Share price } & \$ 32.00 & \text { EPS }=\text { DPS } & \$ 3.20\end{array}$
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 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

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Definitions:

Positive Regard

The acceptance, love, and support one receives from others, often seen as crucial for self-esteem and psychological growth.

Deprivation Need

A concept in psychology referring to the absence of essential psychological or physical needs which can lead to negative outcomes.

Maslow

Pertains to Abraham Maslow, an American psychologist known for creating Maslow's hierarchy of needs, a theory of psychological health predicated on fulfilling innate human needs.

Being Needs

Fundamental aspects of human motivation and personality related to self-actualization, such as creativity, problem-solving, and acceptance of facts.