Question

Edwards Construction currently has debt outstanding with a market value of $87,500 and a cost of 10 percent. The company has EBIT of $8,750 that is expected to continue in perpetuity. Assume there are no taxes.

  

a-1.	What is the value of the company's equity? (Do not round intermediate calculations. Leave no cell blank - be certain to enter "0" wherever required.)

  

Value of equity

  

a-2.	What is the debt-to-value ratio? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

Debt-to-value ratio

  

b.	What are the equity value and debt-to-value ratio if the company's growth rate is 2 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)

  

Equity value	$
Debt-to-value

  

c.	What are the equity value and debt-to-value ratio if the company's growth rate is 4 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)

  

Equity value	$
Debt-to-value

Answer 1

a-1) Value of equity EBIT-DebtxInterest rate =8750-87500*10% a-2) Debt-to-value ratio Debt/Firm value 1.000 =87500/87500 b) Equity value Firm value - Debt $ 2,188 -8750*2%/(10%-2%) 0.976 =87500/(87500+2188) Debt-to-value Debt/Firm value C) Equity value Firm value - Debt $ 5,833 =8750*4%/(10%-4%) 0.938 =87500/(87500+5833) Debt-to-value Debt/Firm value

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