Edwards Construction currently has debt outstanding with a market value of $360,

Question

Edwards Construction currently has debt outstanding with a market value of $360,000 and a cost of 7 percent. The company has an EBIT of $25,200 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 "0" wherever required. Round your debt-to-value answer to 3 decimal places, e.g., 32.161.)

b. What is the equity value and the debt-to-value ratio if the company's growth rate is 3 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.)

c. What is the equity value and the debt-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.g., 32.161.)

Explanation / Answer

Assuming the growth rate is from next to next year onwards
1.
Enterprise Value=25200/7%=360000
Debt=360000
Equity=360000-360000=0
Debt to Value Ratio=1
2.
Enterprise Value=25200/(7%-3%)=630000
Debt=360000
Equity=630000-360000=270000
Debt to Value Ratio=360000/630000=0.571428571
3.
Enterprise Value=25200/(7%-5%)=1260000
Debt=360000
Equity=1260000-360000=900000
Debt to Value Ratio=360000/1260000=0.285714286

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