Colt Systems will have EBIT this coming year of $ 34 million. It will also spend $ 9 million on total capital expenditures and increases in net working capital, and have $ 5 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 25 % and a cost of capital of 12 % .

a. If Colt's free cash flows are expected to grow by 10.6 %

per year, what is the market value of its equity today?

If Colt's free cash flows are expected to grow by10.6 %

per year, the market value is ____-million. (Round to two decimal places.)

Part 2

b. If the interest rate on its debt is

10 %how much can Colt borrow now and still have non-negative net income this coming year?

If the interest rate on its debt is10 %Colt can borrow ______

million. (Round to two decimal places.)

Part 3

c. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds32 %?

Explain. (Select the best choice below.)

A.

No, because the most they should borrow is

$340.00

million, which would give the firm a debt-to-value ratio of

22.1

%.

So, there is no tax incentive to choose a ratio above this.

B.

Yes, because the firm can always use the interest tax shield from borrowing.

C.

No, because they could borrow

$519

million, which would give the firm a debt-to-value ratio of

32

%.

D.

Yes, because they can borrow

$519

million and use the interest tax shield.