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. Colt is currently an all-equity firm with a corporate tax rate of 21% and a cost of capital of 10%. a. If Colt's free cash flows are 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 non-negative net income this coming year? c. The 2017 TCJA limited interest deductions to 30% of taxable income. How much can Colt borrow now to maximize its interest deduction under the new law? d. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 25%? Explain. a. If Colt's free cash flows are expected to grow by 8.5% per year, what is the market value of its equity today? If Colt's free cash flows are expected to grow by 8.5% per year, the market value is 5 million. (Round to one decimal place.) b. If the interest rate on its debt is 8%, how much can Colt borrow now and still have non-negative net income this coming year? If the interest rate on its debt is 8%, Colt can borrow $ million. (Round to one decimal place.) c. The 2017 TCJA limited interest deductions to 30% of taxable income. How much can Colt borrow now to maximize its interest deduction under the new law? To maximize its interest deduction under the new law, Colt must borrow $ million (Round to two decimal places.) d. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 25%? Explain. The most they could borrow is $ 7 million (Debt ratio = 9.5%); interest tax shield from borrowing more. 56.25 187.5 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. Colt is currently an all-equity firm with a corporate tax rate of 21% and a cost of capital of 10%. a. If Colt's free cash flows are 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 non-negative net income this coming year? c. The 2017 TCJA limited interest deductions to 30% of taxable income. How much can Colt borrow now to maximize its interest deduction under the new law? d. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 25%? Explain. a. If Colt's free cash flows are expected to grow by 8.5% per year, what is the market value of its equity today? If Colt's free cash flows are expected to grow by 8.5% per year, the market value is 5 million. (Round to one decimal place.) b. If the interest rate on its debt is 8%, how much can Colt borrow now and still have non-negative net income this coming year? If the interest rate on its debt is 8%, Colt can borrow $ million. (Round to one decimal place.) c. The 2017 TCJA limited interest deductions to 30% of taxable income. How much can Colt borrow now to maximize its interest deduction under the new law? To maximize its interest deduction under the new law, Colt must borrow $ million (Round to two decimal places.) d. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 25%? Explain. The most they could borrow is $ 7 million (Debt ratio = 9.5%); interest tax shield from borrowing more. 56.25 187.5
