solution
solution.
Colt Systems will have EBIT this coming year of $34 million. It will
also spend $9 million on total capital expenditures and increases in net
working capital, and have $4.45 million in depreciation expenses. Colt
is currently an all-equity firm with a corporate tax rate of 21% and a
cost of capital of 11%.
also spend $9 million on total capital expenditures and increases in net
working capital, and have $4.45 million in depreciation expenses. Colt
is currently an all-equity firm with a corporate tax rate of 21% and a
cost of capital of 11%.
a. If Colt’s free cash flows are expected to
grow by 9.6% per year, what is the market value of its equity today?
grow by 9.6% per year, what is the market value of its equity today?
b.
If the interest rate on its debt is 9%, how much can Colt borrow now and
still have non-negative net income this coming year?
If the interest rate on its debt is 9%, how much can Colt borrow now and
still have non-negative net income this coming year?
c. Is there a tax
incentive today for Colt to choose a debt-to-value ratio that exceeds
50%? Explain.
incentive today for Colt to choose a debt-to-value ratio that exceeds
50%? Explain.
a. If Colt’s free cash flows are expected to grow by 9.6%
per year, what is the market value of its equity today?
per year, what is the market value of its equity today?
If Colt’s free
cash flows are expected to grow by 9.6% per year, the market value is $
million. (Round to one decimal place.)
cash flows are expected to grow by 9.6% per year, the market value is $
million. (Round to one decimal place.)
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