Question

I HAVE ALL ANSWERS EXCEPT THE DEBT TO EQUITY VALUE RATIO FOR B AND C. The answers to these are NOT B: 1.030 or C: 0.705

Edwards Construction currently has debt outstanding with a market value of $82,500 and a cost of 7 percent. The company has EBIT of $5,775 that is expected to continue in perpetuity. Assume there are no taxes.

  

a-1.	What is the value of the company's equity? (Do not round intermediate calculations. Leave no cell blank - be certain to enter "0" wherever required.)

  

Value of equity

0

  

a-2.	What is the debt-to-value ratio? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

Debt-to-value ratio

1

  

b.	What are the equity value and debt-to-value ratio if the company's growth rate is 3 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)

  

Equity value	66206.25
Debt-to-value	??????

  

c.	What are the equity value and debt-to-value ratio if the company's growth rate is 5 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)

  

Equity value	220687.50
Debt-to-value	??????

Answer 1

Answer to part b.)

b.) Calculation of Equity Value

Total  Value = [EBIT * (1 + growth rate)] / [Cost of capital - growth rate]

= [5775 * (1 + 0.03)] / [0.07 - 0.03]

= 5948.25 / 0.04

= 148706.25

Equity Value = Total Value - Debt Value

= 148706.25 - 82500

= 66206.25

Debt to Total Value = Debt Value / Total Value

= 82500 / 148706.25

= 0.555

c.) Calculation of Equity Value

Total  Value = [EBIT * (1 + growth rate)] / [Cost of capital - growth rate]

= [5775 * (1 + 0.05)] / [0.07 - 0.05]

= 6063.75 / 0.02

= 303187.5

Equity Value = Total Value - Debt Value

= 303187.5 - 82500

= 220687.5

Debt to Total Value = Debt Value / Total Value

= 82500 / 303187.5

= 0.272