Question
Colt Systems will have EBIT this coming year of $15 million. It will also spend $6 million on total capital expenditures and increases in net
Colt Systems will have EBIT this coming year of $15 million. It will also spend $6 million on total capital expenditures and increases in net working capital, and have $3 million in depreciation expenses (assume CCA = depreciation). Colt is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.
a. If Colt is expected to grow by 8.5% per year, what is the market value of its equity today?
b. If the interest rate on its debt is 8%, how much can Colt borrow now and still have nonnegative net income this coming year?
c. Is there a tax incentive for Colt to choose a debt-to-value ratio that exceeds 50%? Explain.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started