Question

BMD is a firm with no debt on its books currently and a market value of equity of $2 billion. On the basis of its EBITDA of $200 million, it can afford to have a debt ratio of 50%, at which level the firm value should be $300 million higher.
a. Assuming that the firm plans to increase its leverage instantaneously, what are some of the approaches it could use to get to 50%?
b. Is there a difference between repurchasing stock and paying a special dividend as a leverage increasing tactic? Why or why not?
c. If BMD has a cash balance of $250 million at this time, will it change any of your analysis?


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  • CreatedApril 15, 2015
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