Estimate the debt ratio for iou

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Reference no: EM13963117

IOU has $5 billion in debt outstanding (carrying an interest rate of 9 percent), and 10 million shares trading at $50 per share. Based on its current EBIT of $200 million, its optimal debt ratio is only 30 percent. The firm has a beta of 1.20, and the current Treasury bond rate is 7 percent. Assuming that the operating income will increase 10 percent a year for the next five years and that the firm's depreciation and capital expenditures both amount to $100 million annually for each of the five years, estimate the debt ratio for IOU if it

a. maintains its existing policy of paying $50 million a year in dividends for the next five years.

b. eliminates dividends.

Reference no: EM13963117

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