Question

Edwards Construction currently has debt outstanding with a market value of $360,000 and a cost of 7 percent. The company has an EBIT of $25,200 that is expected to continue in perpetuity. Assume there are no taxes. a. What is the value of the company's equity and the debt-to-value ratio? (Do not round intermediate calculations. Leave no cells blank - be certain to enter "O" wherever required. Round your debt-to-value answer to 3 decimal places, e.g., 32.161.) Equity value Debt-to-value b. What is the equity value and the debt-to-value ratio if the company's growth rate is 3 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g., 32.16, and round your debt-to-value answer to 3 decimal places, e.g., 32.161.) Equity value Debt-to-value

Answer 1

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PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) Review View Add-Ins File Home Insert Page Layout Formulas Data - 2x % Cut Calibri 11 A A = = = V General Wrap Text Merge & Center AutoSum - A Fill 2 Sort & BIU D - - A- ES E E E Copy Paste Format Painter Clipboard $ % 48.08 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Find & Select Font Alignment Number Cells HR150 HI HJ HK HL HM HN HO HP HQ HR H S HT HU HV 145 146 (a) 25200 THE INTEREST ON DEBT = 360000 X 7% = THIS IS EXACTLY EQUAL TO EBIT SO NOTHING IS AVAILABLE FOR SHAREHOLDERS 147 148 149 150 151 152 153 VALUE OF EQUITY VALUE OF DEBT VALUE OF FIRM 360000 360000 154 155 DEBT TO VALUE = 3600000/3600000 = ANS EQUITY VALUE DEBT TO VALUE 156 157 158 159 160 161 162 163 W Rea IF GROWTH RATE IS 3% NEXT YEAR EARNINGS WILL BE = 25200*(1+0.03) = PAYMENT TO DEBT HOLDERS = PAYMENT TO SHAREHOLDERS = LOAN OPTIONS pv, fv, annuity CAP STRU VALUE profit margin_loan with points 25956 25200 756 [25956-25200] LOCK BOX DILUTION DOLLAR COST AVG CALCULATOR ferences EXPONPER APR CPI ear FVA PO BO 130% I + DO 4 * 410 ENG 22-11-2019

PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) Review View Add-Ins File Home Insert Page Layout Formulas Data - 2x % Cut Calibri 11 A A = = = V General Wrap Text Merge & Center AutoSum - A Fill 2 Sort & BIU D - - A- ES E E $ % 48.08 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear E Copy Paste Format Painter Clipboard HR177 HI Find & Select Filter Editing Alignment Number Cells Font fax HK HJ HL HM HN HO HP HQ HRHSHI HU HV 159 (b) 160 161 162 163 164 165 166 IF GROWTH RATE IS 3% NEXT YEAR EARNINGS WILL BE = 25200*(1+0.03) = PAYMENT TO DEBT HOLDERS = PAYMENT TO SHAREHOLDERS = 25956 25200 756 [25956-252001 VALUE OF EQUITY = 756/(0.07-0.03) = VALUE OF DEBT VALUE OF FIRM 18900.00 360000 378900.00 167 DEBT TO VALUE = 360000/378900 = 0.950 ANS EQUITY VALUE DEBT TO VALUE 18900.00 0.950 168 169 170 171 172 173 174 175 176 177 W Rea IF GROWTH RATE IS 5% NEXT YEAR EARNINGS WILL BE = 25200*(1+0.05) = LOAN OPTIONS pv, fv, annuity CAP STRU VALUE profit margin_loan with points 26460 LOCK BOX DILUTION DOLLAR COST AVG CALCULATOR ferences EXPONPER APR CPI ear FVA PO BO 130% _ 0_ + DO 4 * 410 ENG 22-11-2019

PV, FV, ANNUITY (Autosaved) - Microsoft Excel (Product Activation Failed) Review View Add-Ins File Home Insert Page Layout Formulas Data - 2x % Cut General AutoSum - A Fill 2 Sort & $ % 48.08 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Find & Select Number Cells HO HP HQ HR H S HT HU HV Calibri 11 A A = = = V Wrap Text E Copy Paste BIU D - - A- ES E Format Painter E Merge & Center Clipboard Font Alignment HR192 foc HI HJ HK HL HM HN 174 175 176 (c) IF GROWTH RATE IS 5% 177 NEXT YEAR EARNINGS WILL BE = 25200*(1+0.05) = 178 PAYMENT TO DEBT HOLDERS = 179 PAYMENT TO SHAREHOLDERS = 26460 25200 1260 [26460-25200] 180 VALUE OF EQUITY = 1260/(0.07-0.05) = VALUE OF DEBT VALUE OF FIRM 63000.00 360000 423000.00 181 182 183 184 185 186 DEBT TO VALUE = 360000/423000 = 0.851 187 ANS EQUITY VALUE DEBT TO VALUE 63000.00 0.851 188 189 190 191 192 LOAN OPTIONS pv, fv, annuity CAP STRU VALUE profit margin_loan with points LOCK BOX DILUTION DOLLAR COST AVG W Rea I CALCULATOR ferences EXPONPER APR CPI ear FVA PO BO 130% + DO 4 * 410 ENG 22-11-2019