#11

Colt Systems will have EBIT this coming year of $34 million. It will also spend $14 million on total capital expenditures and increases in net working capital, and have $7 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 30% and a cost of capital of 12%. a. If Colt's free cash flows are expected to grow by 8.1% per year, what is the market value of its equity today? b. If the interest rate on its debt is 10%, 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 89% ? Explain. a. If Colt's free cash flows are expected to grow by 8.1% per year, what is the market value of its equity today? If Colt's free cash flows are expected to grow by 8.1% per year, the market value is $ million. (Round to two decimal places.) b. If the interest rate on its debt is 10%, how much can Colt borrow now and still have non-negative net income this coming year? If the interest rate on its debt is 10%, Colt can borrow $ million. (Round to two decimal places.) c. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 89% ? Explain. (Select the best choice below.) A. Yes, because they can borrow $474 million and use the interest tax shield. B. No, because they could borrow $474 million, which would give the firm a debt-to-value ratio of 89%. C. No, because the most they should borrow is $340.00 million, which would give the firm a debt-to-value ratio of 78.9%. So, there is no tax incentive to choose a ratio above this. D. Yes, because the firm can always use the interest tax shield from borrowing