Question

Edwards Construction currently has debt outstanding with a market value of $280,000 and a cost of 6 percent. The company has an EBIT of $16,800 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 "0" 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 4 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

c. What is the equity value and the debt-to-value ratio if the company's growth rate is 5 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

a

Interest Payment=280000 × 0.06=16,800

EBIT=16,800

Cashflow for Shareholders= 0

Value of Equity= 0

Debt to Value of Firm=280000/280000=1

b. What is the equity value and the debt-to-value ratio if the company's growth rate is 4 percent?

Earnings next year = $16800*(1.04) = $17,472

Cashflow for Shareholders= 17472-16800

Value of equity = $672 / (.06 – .04) =33600

Debt to Value of Firm=280000/(33600+280000)=.893

c. What is the equity value and the debt-to-value ratio if the company's growth rate is 5 percent?

Earnings next year = $16800*(1.05) = $17,640

Cashflow for Shareholders= 17640-16800

Value of equity = $840/ (.06 – .05) =84000

Debt to Value of Firm=280000/(84000+280000)=.769