Question

Company currently has debt outstanding with a market value of $107,500 and a cost of 7 percent. The company has EBIT of $7,525 that is expected to continue in perpetuity. Assume there are no taxes.
a. What is the value of the company's equity?
What is the debt-to-value ratio? (Do not round intermediate calculations)
b. What are the equity value and debt-to-value ratio if the company's growth rate is 5 percent? (Do not round intermediate calculations and round Debt-to-value answer to 3 decimal places)
Shows all the step and formula. Don't round off until you get the answer.

Answer 1

Answer: EB773 $ 7525 capital cost of of company = 7% value of company : EBIT Cost of capital 7525 0.07 value of Company = $ 107500 (a) value of Equity = value of Company - Debt value 3 $ lo 7500 o- $ 107500 Equity value =10 Debt value Debt-to - value ratio = value of company $ 107500 & 10 7500 1 Debt-to - value ratio =

(b) If growth rate as 5% value of company = EBIT (It growth rate) Cost of equity - growth rate $ 7525 (1 + 0.05) 0.07 - 0.05 = $ 395062.5 value of equity = value of company - Debt value = $ 395062.5 -$107500 = $ 287562.5 Debt - to - valve ratio = Debt value value of company 107500 39 50 62.5 Debt-to-value ratio value to debt ra = 0.2721