1. BMD is a firm with no debt on its books currently and a market value of equity of $2 billion. Based on its EBITDA of $200 million, it can afford to have a debt ratio of 50 percent, at which level the firm value should be $300 million higher.
a. Assuming that the firm plans to increase its leverage instantaneously, what are some of the approaches it could use to get to 50 percent?
b. Is there a difference between repurchasing stock and paying a special dividend? Why or why not?
c. If BMD has a cash balance of $250 million at this time, will it change any of your analysis?