Problem 15-3 Capital Structure and Growth Edwards Construction currently has deb
ID: 2615172 • Letter: P
Question
Problem 15-3 Capital Structure and Growth Edwards Construction currently has debt outstariding with a market value of $430,000 and a cost of 6 percent. The company has an EBIT of $25,800 that is expected to continue in perpetuity. Assume there are no taxes. a. What is the value of the company's equity and the debt-to-value ratio? (Do not round intermediate calculations. Leave no cells blank- be certain to enter "O" wherever required. Round your debt-to-value answer to 3 decimal places, e.g., 32.161.) Equity value Debt-to- value b. What is the equity value and the debt-to-value ratio if the company's growth rate is 4 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g, 32.16, and round your debt-to-value answer to 3 decimal places e.g., 32.161.) equity value Debt-to value c. What is the equity value and the debl-to-value ratio if the company's growth rate is 5 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g. 32.16, and round your debt to-value answer to 3 decimal places e.9- 32.161) Equity value Debt-to" valueExplanation / Answer
Weighted Average Cost of Capital=6%
a)Value of firm=EBIT/WACC
=25800/.06
=430000
Value of equity=Value of firm-Market Value of Debt
=430000-430000
=0
Debt to value = debt/equity
= 0
b)Value of firm= EBIT/(WACC-GROWTH)
=25800/(.06-.04)
=1290000
Value of Equity=Value of firm - Market Value of debt
=1290000-430000=$860000
Debt to value=debt/equity
=430000/860000
=.5
=50%
c)Value of firm=25800/(.06-.05)
=2580000
Value of equity=2580000-430000
=2150000
Debt to value=430000/2150000
=.2
=20%