Colt Systems will have NI this coming year of $ 42 million. It will also spend $1 million on total capital expenditures and increases in net working capital, and have $4 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 40% and a cost of capital of 15%.

a) If Colt is expected to grow by 3% per year, what is the market value of its equity today?

b)Suppose Colt plans to borrow at 7% interest rate, and use the proceeds to pay special dividend to its shareholders. What would be the optimal value of debt from the tax minimization perspective?

c) What would be debt-to-value ratio after the recapitalization?