What is the market value of its equity today

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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 depreciation expenses (assume CCA = depreciation). Colt is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.

a. If Colt is 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 nonnegative net income this coming year?

c. Is there a tax incentive for Colt to choose a debt-to-value ratio that exceeds 50%? Explain.

Reference no: EM131492843

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