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Connor Electric currently has debt outstanding with a market value of $70,000 and a cost of 10 percent. The company has EBIT of $7,000 that is expected to continue in perpetuity. Assume there are no taxes.
I. What is the value of the company's equity?
A. $50,000
B. $100,000
C. $0
D. $1,000,000
E. Impossible to calculate with information given.
II. What is the debt-to-value ratio?
A. 1.0
B. 1.9
C. 0.5
D. 1.26
III. What are the equity value and debt-to-value ratio if the company's growth rate is 5 percent?
A. 0.909
B. 0.954
C. 0.891
D. 0.526
IV. What are the equity value and debt-to-value ratio if the company's growth rate is 9 percent?
A. 0.526
B. 0.909
C. 0.641
D. 1.263
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