Question: 9. (3 points) Colt Systems will have EBIT this coming year of $12 million. It will also spend $5 million on total capital expenditures and

9. (3 points) Colt Systems will have EBIT this coming year of $12 million. It will also spend $5 million on total capital expenditures and increases in net working capital, and have $2 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.

  1. If Colt is expected to grow by 5% per year, what is the market value of its equity today?

  1. If the interest rate on its debt is 7%, how much can Colt borrow now and still have nonnegative net income this coming year?

  1. What would be Colts debt-to-value ratio and is there tax incentive to exceed it? Explain.

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