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Problem # 2
Initial investment 100,000,000
EBIT 20,000,000
Interest (4,000,000)
EBT 16,000,000
Taxes (6,400,000)
Net income 9,600,000
b.
Total investment 100,000,000
Cash flow to firm = EBIT (1-t)+Depreciation
EBIT (1-t)= 12,000,000
Depreciation = 5,000,000
CF to firm = 17,000,000
The debt is in the form of long term bonds, with a coupon rate of
10%. The bonds are currently rated AA and are selling at a yield of
12%. (The market value of bond is 80% of the face value)
The firm currently has 50 million shares outstanding, and the current
market price is $80 per share. The firm pays a dividend of $4 per
share and has a price/earnings ratio of 10.
The stock currently has a beta of 1.2. The treasury bond rate is 8%.
The tax rate of the firms is 40%.
a. What is the debt to equity ratio for this firm in book value terms? In market
value terms?
b. What is the debt/(debt + equity) ratio of this firm in the book value terms?
In market value terms?