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Question Workspace
The following information has been presented to you about the Gibson Corporation.
| Total assets | $3,000 million | Tax rate | 25% | |
| Operating income (EBIT) | $800 million | Debt ratio | 0% | |
| Interest expense | $0 million | WACC | 10% | |
| Net income | $480 million | M/B ratio | 1.00× | |
| Share price | $32.00 | EPS = DPS | $3.20 |
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?
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