Wacc

18.04%

15.38%

-2.66%

Firm Value (with no growth) $ 3,343 mil

$ 3,921 mil

$ 578 mil

Stock Price

$ 39.50

$ 46.64

$ 7.14

This analysis was based upon the 1995 earnings before interest and taxes of $ 420 million, and a tax rate of 36.90%.

a. Why is the optimal debt ratio for Reebok so high?

b. What might be some of your concerns in moving to this optimal?

20. Timberland Inc., a manufacturer and retailer of footwear and sportswear, is considering is highly levered status. In 1995, the firm had $ 237 million in market value of debt outstanding, and 11 million shares outstanding at $ 19.88 per share. The firm had earnings before interest and taxes of $ 44 million, a book value of capital of $ 250 million and a tax rate of 37%. The treasury bond rate is 7.88%, and the stock has a beta of 1.26. The following table summarizes the estimated bond ratings and interest rates at different levels of debt for Timberland -

Debt Ratio

Bond Rating

Interest Rate on Debt

0%

Recession Remedy

Recession Remedy

Free Yourself From Debt Forever. Discover How A Laid Off Worker In Dire Straits Freed Himself From His Unimaginable Debt, Conquered Recession And Carved His Way To Financial Freedom. Finally You Can Fully Equip Yourself With These “Must Have” Tools For Conquering Recession And Live A Life Without Having To Worry About Debt Collectors.

Get My Free Ebook


Post a comment