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


The Debt Beater System

The Debt Beater System

Learn How You Can End the Fear and Worry Created by Bad Credit and Debt Collectors. Get Out of Debt Quickly and Easily, Right Now. I am going to show YOU how to become a

Get My Free Ebook

Post a comment