Lola’s Dance Studio currently has debt outstanding with a market value of $100,000 and a cost of 8 percent. The company has EBIT of $8,000 that is expected to continue in perpetuity. Assume there are no taxes.
I. What is the value of the company's equity?
A. $50,000
B. $100,000
C. $1,000,000
D. $0
E. Impossible to calculate with information given.
II. What is the debt-to-value ratio?
A. 1.0
B. 1.9
C. 0.5
D. 1.26
E. Impossible to calculate with information given.
III. What are the equity value and debt-to-value ratio if the company's growth rate is 3 percent?
A. 1.000
B. 0.954
C. 0.641
D. 1.263
E. Impossible to calculate with information given.
IV. What are the equity value and debt-to-value ratio if the company's growth rate is 7 percent?
A. 1.000
B. 0.954
C. 0.641
D. 1.263
E. Impossible to calculate with information given.