ABC has $5 billion in debt outstanding (carrying an interest rate of 9%), and 10 million shares...

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ABC has $5 billion in debtoutstanding (carrying an interest rate of 9%), and 10 millionshares trading at $50 per share. Based on its current EBIT of $ 200million, its optimal debt ratio is only 30%. The firm has a beta of1.20, and the current T-bond rate is 7%. Assuming that theoperating income will increase 10% a year for the next five yearsand that the firm's depreciation and capital expenditures bothamount to $ 100 million annually for each of the five years,estimate the debt ratio for ABC if
a. It maintains its existingpolicy of paying $50 million a year in dividends for the next 5years.
b. It eliminates dividends

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a Debt ratio assuming policy of 50 million dividend Current debt ratio based 200 million EBIT 30 Total debt 5000m Debt ratio total debt total assets Total assets total debt debt ratio 500003 16667m Year assuming 50m dividend 1 2 3 4 5 EBIT 10 growth each year 220 242 266 293 322 Interest cost 9 of total debt 450 See Answer

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ABC has $5 billion in debtoutstanding (carrying an interest rate of 9%), and 10 millionshares trading at $50 per share. Based on its current EBIT of $ 200million, its optimal debt ratio is only 30%. The firm has a beta of1.20, and the current T-bond rate is 7%. Assuming that theoperating income will increase 10% a year for the next five yearsand that the firm's depreciation and capital expenditures bothamount to $ 100 million annually for each of the five years,estimate the debt ratio for ABC ifa. It maintains its existingpolicy of paying $50 million a year in dividends for the next 5years.b. It eliminates dividends