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Gentry Motors Inc., a producer of turbine generators, is in this situation: EBIT = $4 million, tax rate = T = 35%, debt outstanding =
Gentry Motors Inc., a producer of turbine generators, is in this situation: EBIT = $4 million, tax rate = T = 35%, debt outstanding = D = $2 million, rd = 10%, rs = 15%, shares of stock outstanding = N0 = 600,000, and book value per share = $10. Because Gentrys product market is stable and the company expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds.
- If Gentry did not have to refund the $2 million of old debt, how would this affect the situation? Assume that the new and the still outstanding debt are equally risky, with rd = 12%, but that the coupon rate on the old debt is 10%.
- What is Gentrys TIE coverage ratio under conditions in Part A of this question?
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