How is the analysis in part C different if firms U and L are growing? Assume that both firms are growing at a rate of 7 percent and that the investment in net operating assets required supporting this growth is 10 percent of EBIT.

MINI CASE 

David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30 percent debt, and Mr. Lyons wonders why they use so much more debt, and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: