Colt Systems will have EBIT this coming year of $15 million. It will also spend $6 million on total capital expenditures and increases in net working capital, and have $3 million in deprecia- tion expenses. Colt is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.
a. If Colt’s free cash flows are expected to grow by 8.5% per year, what is the market value of its equity today?
b. If the interest rate on its debt is 8%, how much can Colt borrow now and still have non- negative net income this coming year?
c. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 50%?
Explain.
Already registered? Login
Not Account? Sign up
Enter your email address to reset your password
Back to Login? Click here