Use the information for the question(s)below.
Omicron Industries' Market Value Balance Sheet ($ Millions)
and Cost of Capital Omicron Industries' New Project Free Cash Flows (Millions) Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt to equity ratio.
-The debt capacity for Omicron's new project in year 1 is closest to:
A)$38.50 million.
B)$48.25 million.
C)$50.25 million.
D)$58.00 million.

Question

Use the information for the question(s)below.
Omicron Industries' Market Value Balance Sheet ($ Millions)
and Cost of Capital  Omicron Industries' New Project Free Cash Flows (Millions)  Assume that this new project is of average risk for Omicron and that the firm wants to hold constant its debt to equity ratio.
-The debt capacity for Omicron's new project in year 1 is closest to:
A)$38.50 million. 
B)$48.25 million. 
C)$50.25 million. 
D)$58.00 million.

Quizplus · Accepted Answer

The debt capacity is calculated as the product of the project's EBITDA and the debt-to-EBITDA ratio. In this case, the project's EBITDA is $50 million and the debt-to-EBITDA ratio is 77%. Therefore, the debt capacity is $50 million * 77% = $38.50 million.

Use the Information for the Question(s)below