Pettit printing Company has a total market value of IDR100 billion, consisting of 1 billion shares selling for IDR50 per share and IDR50 billion of 10 percent perpetual bonds now selling at par value. 1. The firm’s EBIT is IDR13.24 billion, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70 percent (based on market values) or decreasing it to 30 percent. If it decides to increase its use of financial leverage, it must call its old bonds and issue new ones with a 12 percent coupon. If it decides to decrease its financial leverage, it will call in its old bonds and replace them with new 8 percent coupon bonds. The firm will sell or repurchase stock at its new equilibrium price to complete the capital structure change.
The firm pays out all earnings as dividends; hence, its stock is zero growth stock. Its current cost of equity, rs, is 14 percent. If it increases financial leverage, rswill be 16 percent. If it decreases financial leverage, rswill be 13 percent.
Question: Calculate the firm’s WACC and total corporate value under each capital structure