The Following Information Has Been Presented to You About the Gibson

The following information has been presented to you about the Gibson Corporation. $$\begin{array} { l c } \text { Total assets } & \$ 3,000 \text { millionTax rate } &40\%\\\text { Operating income (EB IT) } & \$ 800 \text { millionDebt ratio }&0\% \\\text { Interest expense } & \$ 0 \text { millionWACC }&10\% \\\text { Net income } & \$ 480 \text { millionM/B ratio } &1.00×\\\text { Share price } & \$ 32.00 \mathrm { EPS } = \mathrm { DPS }&\$3.20\end{array}$$ 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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