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ABC has $5 billion in debtoutstanding (carrying an interest rate of 9%), and 10 millionshares trading at $50 per share. Based on its current EBIT of $ 200million, its optimal debt ratio is only 30%. The firm has a beta of1.20, and the current T-bond rate is 7%. Assuming that theoperating income will increase 10% a year for the next five yearsand that the firm's depreciation and capital expenditures bothamount to $ 100 million annually for each of the five years,estimate the debt ratio for ABC ifa. It maintains its existingpolicy of paying $50 million a year in dividends for the next 5years.b. It eliminates dividends
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