Question
Please utilise the following key economic and financial data for the firm Sour Plum Co. The firm has an interest rate on debt of 4%
Please utilise the following key economic and financial data for the firm Sour Plum Co. The firm has an interest rate on debt of 4% and the cost of equity capital is 15%. The market value and book value of debt are approximately equal. The company has earnings before interest and tax (EBIT) of $40 million, debt of $800 million, market value of equity of $400 million and book value of equity of $100 million. The Sales are $200 million and the tax rate is 30%. Comparable firms have average interest coverage of 3.0 times and average debt-to-equity ratios of 1.0 on a market value basis. They also have average EBIT/Sales ratios of 26.7%. This firm and comparable firms have similar proportions of variable costs to sales which is 20%. What is the ratio of firm value to EBIT?
a. 1-10
b. 11-20
c. 21-30
d. 30-40
e. 41-50
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