(Answered) Question iou inc has 5 billion in debt outstanding

Finance

Question: IOU Inc. has $ 5 billion in debt outstanding (carrying an interest rate of 9%), and 10 million shares trading at $ 50 per share. Based upon its current EBIT of $ 200 million, its optimal debt ratio is only 30%. The firm has a beta of 1.20, and the current treasury bond rate is 7%. Assuming that the operating income will increase 10% a year for the next five years and that the firm's depreciation and capital expenditures both amount to $ 100 million annually for each of the five years, estimate the debt ratio for IOU if

a. it maintains its existing policy of paying $ 50 million a year in dividends for the next 5 years.

b. it eliminates dividends.

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