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%

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