BMD is a firm with no debt on its books currently and a market value of equity of $2 billion. On the basis of its EBITDA of $200 million, it can afford to have a debt ratio of 50%, at which level the firm value should be $300 million higher.

c. If BMD has a cash balance of $250 million at this time, will it change any of your analysis?

a.

Not enough information to tell.

b.

No, cash does not affect the debt/capital ratio

c.

It depends on taxes.

d.

Yes, they can use the cash to buyback stock and borrow less to reach a target debt/capital ratio