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

---

Definitions:

Capital Budgeting

The process of planning and managing a company’s long-term investments in projects or assets.

Technical Inputs

Elements related to the technological aspects of a project or system, including machinery, design parameters, and software requirements that contribute to its overall functionality and efficiency.

Time Value

The idea that money currently in hand is more valuable than an identical sum received later, because of its ability to earn more over time.

Relevant Cash Flow

Cash flows that will occur as a direct result of a decision made by a business, essential in capital budgeting and investment analysis.