The Following Information Has Been Presented to You About the Gibson

question 67

Multiple Choice

The following information has been presented to you about the Gibson Corporation.

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:

Price Elasticity

A gauge of the responsiveness of the amount of a product desired to alterations in its cost, reflecting demand's sensitivity to changes in price.

Revenue

The comprehensive total of money a firm collects from offering goods or services in a pre-determined period.

Total Revenue

The total amount of money a company receives from its business activities, calculated by multiplying the price of goods or services by the number of units sold.

Baseball Stadium

A specialized venue designed primarily for hosting baseball games.