Colt Systems will have EBIT this coming year of $29 million. It will also spend...
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Colt Systems will have EBIT this coming year of $29 million. It will also spend $14 million on total capital expenditures and increases in net working capital, and have $7.34 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 21% and a cost of capital of 11%. a. If Colt's free cash flows are expected to grow by 9.1% per year, what is the market value of its equity today? b. If the interest rate on its debt is 9%, how much can Colt borrow now and still have non-negative net income this coming year? c. Is there a tax incentive today for Colt to choose a debt-to-value ratio that exceeds 50%? Explain.
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