The Following Information Has Been Presented to You About the Gibson

question 84

Multiple Choice

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

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:

Source

Origin from which something arises or is obtained.

Sink

A basin used for washing and typically connected to a water supply and drainage system.

Xylem

The tissue in plants that transports water and some nutrients from the roots to the leaves.

Bundle Scars

Marks left on the stem of a plant where vascular bundles or leaf traces have broken off or been removed.