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

Eccles Inc

Multiple Choice

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