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 workingcapital, and have $3 million in depreciation expenses. Colt is currently anall-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.

a. IfColt's free cash flows are expected to grow by 8.5% peryear, what is the market value of its equitytoday?

b. If the interest rate on its debt is 8%, how much can Colt borrow now and still havenon-negative net income this comingyear?

c. Is there a tax incentive today for Colt to choose adebt-to-value ratio that exceeds 50%? Explain.