Capital Structure and Leverage - Solutions5

# Capital Structure and Leverage - Solutions5 - Units Sales...

This preview shows pages 1–3. Sign up to view the full content.

Old Exam Questions - Capital Structure and Leverage - Solutions Page 21 of 59 Pages Units 600,000.00 Units 500,000.00 Sales \$3,000,000.00 Sales \$2,250,000.00 Variable Costs -\$2,400,000.00 Variable Costs -\$1,500,000.00 Fixed Costs -\$500,000.00 Fixed Costs -\$600,000.00 EBIT \$100,000.00 EBIT \$150,000.00 Interest -\$100,000.00 Interest -\$150,000.00 EBT \$0.00 EBT \$0.00 Taxes (40%) \$0.00 Taxes (40%) \$0.00 Net Income \$0.00 Net Income \$0.00 21. Your company is financed entirely by common stock that is priced to offer a 10% annual expected/required rate of return. If the company repurchases 40% of its common stock and substitutes an equal value of debt, its levered cost of equity will increase to 14.0%. Assuming that we are in a Modigliani and Miller world without taxes, where the value of the firm remains constant at all levels of debt, what must be the firm’s cost of debt? A. 4.6% B. 4.4% C. 4.2% * D. 4.0% E. 3.8% In this sort of M&M world, the average cost of capital will not change. Therefore, WACC = 10% = (.40)(K D ) + (.60)(.14) K D = (.10 - .084)/(.40) = 4.0% 22. You are given the information indicated below. Using the same procedure demonstrated in class (price changes in anticipation of the new level of debt), calculate by how much the price of this firm's stock will increase if it moves to \$20,000 of debt and uses the proceeds to repurchase its equity. Assets Starting Values Current Assets \$20,000 Net Fixed Assets \$20,000 Total \$40,000 Liabilities & Net Worth Starting Values Debt \$0 Equity (4,000 Shares) \$40,000 Total \$40,000

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Old Exam Questions - Capital Structure and Leverage - Solutions Page 22 of 59 Pages A. \$1.11 * B. \$1.31 C. \$1.51
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

Capital Structure and Leverage - Solutions5 - Units Sales...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online