Answer :
Answer:
a-1 = $0
a-2 = 1
b-1 = $208.89
b-2 = 0.998
c-1 = $487.20
c-2 = $0.994
Explanation:
A
1) Interest = Debt value × Interest% = $87,000 × 8% = $6,960
Therefore the value of the company's equity is it's net income.
Net Income = EBIT - Interest
$6,960 - $6,960 = 0
Value of company's equity is 0.
2) The ratio of Debt to value of firm = Debt/ Value
Debt = $87,000
Value = debt + equity = $87,000 + $0 = $87,000
Therefore; Dept to value ratio is
$87,000 ÷ $87000 = 1
B
If the company's Growth Rate is 3%
1) Earnings next year EBIT = $6,960 × (1 + 3%) = $7,168.80
Since the equity value is equal to Net Income.
Net Income = EBIT - Interest
$7168.80 - $6,960 = $208.80
Therefore;
Equity Value = $208.80
2) Dept to value ratio = Dept/value
Debt = $87,000
Total Value = Debt + Equity = 87000 + 208.80 = 87208.80
Therefore; Debt to value will be
87000 ÷ 87208.80 = 0.998
C
If the company's Growth Rate is 7%
1) Earnings next year EBIT = $6,960 × (1 + 7%) = $7447.20
Since the equity value is equal to the Net income.
Net Income = EBIT - Interest = $7447.20 - $6,960 = $487.20
Therefore;
Equity Value = $487.20
2) The ratio of Dept to value = Dept/value
Debt = $87,000
Total Value = Debt + Equity = $87000 + $487.20 = $87487.20
Therefore; Debt to value ratio
$87000 ÷ $87487.20 = 0.994