Colt Systems will have EBIT this coming year of $ 23

$23 million. It will also spend $ 9

$9 million on total capital expenditures and increases in net workingcapital, and have $ 5

$5 million in depreciation expenses. Colt is currently anall-equity firm with a corporate tax rate of 35 %

35%, and a cost of capital of 12 %

12%.

a. If Colt is expected to grow by 10.5 %

10.5% peryear, what is the market value of its equitytoday?

b. If the interest rate on its debt is 10 %

10%, 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 42 %

42%? Explain.