Colt Systems will have EBIT this coming year of $18 million. It will also spend $7 million on total capital expenditures and increases in net working capital, and have $4 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 30% and a cost of capital of 11%.

a. If Colt’s free cash flows are expected to grow by 9.5% 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?

c. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 41%? Explain.