Problem:
Total assets $3,000 million
Tax rate 40%
Operating income (EBIT) $800 million
Debt ratio 0%
Interest expense $0 million
WACC 10%
Net income $480 million
M/B ratio 1.00x
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 percent debt and 80 percent equity (based on market values) that the cost of equity will increase to 11 percent and that the pre-tax cost of debt will be 10 percent.
If the company makes this change, what would be the total market value of the firm? (The answers are in millions.)