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Question: IOU Inc. has $ 5 billion in debt outstanding (carrying an interest rate of 9%), and 10 million shares trading at $ 50 per share. Based upon its current EBIT of $ 200 million, its optimal debt ratio is only 30%. The firm has a beta of 1.20, and the current treasury bond rate is 7%. Assuming that the operating income will increase 10% 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
a. it maintains its existing policy of paying $ 50 million a year in dividends for the next 5 years.
b. it eliminates dividends.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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