A firm with a normalized pretax income of $40 million,25% tax rate, and a Total Debt/Total Capital ratio of 30%, decidesto undertake a capital expansion financed by new debt. The newlevel of debt will raise the Total Debt/Total Capital ratio to 40%(5-percentage points above its industry average). As a result, thefirmAc€?cs credit rating is downgraded by a full level (say forexample, from A to B) despite being secured by specific assets.This credit downgrade raises the firmAc€?cs Weighted Average Cost ofCapital (aka Required Rate of Return) from 10% to11.5%What is the value of the firm prior to the downgradedcredit rating?Assuming the firmAc€?cs capital expansion program will leadto a 20% increase in normalized pretax income what is the firmAc€?csvalue in the aftermath of the credit downgrade?
A firm with a normalized pretax income of $40 million,25% tax rate, and a Total Debt/Total Capital
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