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Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.                                       Current            Proposed         Assets                          $10,000           $18,000           Debt                                     $0             $8,000           Equity                         $10,000           $10,000           Debt/Equity ratio              0.00                 1.00           Interest rate                         n/a                    7%          Shares outstanding             500                 500            Share price                         $20                 $20 (b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.

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Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.

 

                                    Current            Proposed        

Assets                          $10,000           $18,000          

Debt                                     $0             $8,000          

Equity                         $10,000           $10,000          

Debt/Equity ratio              0.00                 1.00          

Interest rate                         n/a                    7%         

Shares outstanding             500                 500           

Share price                         $20                 $20

(b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.

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