Colt Systems had NI in the year just ended of $5 million. It spent $3 million on total capital expenditures and increases in net working capital, and had $7 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.

1. (4 points) If Colt could borrow under 8% interest rate, how much Colt could have borrowed to maximize value of the interest tax shield?
2. (5 points) Find debt-to-value ratio if Colt borrows the amount you found in a). Assume that Colt is expected to grow at 3% annually perpetually.