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solution

Colt Systems will have EBIT this coming year of $34 million. It will
also spend $9 million on total capital expenditures and increases in net
working capital, and have $4.45 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 9.6% 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.
a. If Colt’s free cash flows are expected to grow by 9.6%
per year, what is the market value of its equity today?
If Colt’s free
cash flows are expected to grow by 9.6% per year, the market value is $
million. (Round to one decimal place.)

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