The Following Information Has Been Presented to You About the Gibson

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

Correct Answer:

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