Question: BMD Inc is a firm with no debt on its books currently and a market value of equity of $ 2 billion. Based upon its EBITDA of $ 200 million, it can afford to have a debt ratio of 50%, 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%?
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?