Capital Structure and Leverage 7

Capital Structure and Leverage 7 - fixed costs of $200,000,...

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Old Exam Questions - Capital Structure and Leverage Page 7 of 31 Pages Assets Starting Values Current Assets $10,000 Net Fixed Assets $20,000 Total $30,000 Liabilities & Net Worth Starting Values Debt $ 0 Equity (3,000 Shares) $30,000 Total $30,000 Other Information Year 0 Dividend Payout 100% Growth 0% EPS $2.00 DPS $2.00 Current Market Price $12.50 Dividend Yield 16% Risk-free rate 8% Market Risk Premium 5% A. $0.61 B. $0.93 C. $1.12 D. $1.64 E. None of the above. 5. Your company has sales of $1,000,000 ($10 per unit), variable costs of $600,000,
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Unformatted text preview: fixed costs of $200,000, and EPS of $2.25. If the firms degree of financial leverage is equal to 1.2, then what will be the projected EPS, assuming a 10% increase in sales and no change in the firms balance sheet (i.e., assets, liabilities, and the number of shares outstanding remain constant). A. $2.45 B. $2.66 C. $2.79 D. $2.87 E. $2.95 Income Statement Starting Values Sales $50,000 Fixed Costs -$10,000 Variable Costs -$30,000 EBIT $10,000 Interest $ 0 EBT $10,000 Taxes (40%) -$ 4,000 Net Income $ 6,000 Amount Borrowed Cost of Debt Equity Beta Cost of Equity $0 0.0% 1.60 16.00% $5,000 10.0% 1.80 17.00% $10,000 12.0% 2.00 18.00% $15,000 14.0% 2.40 20.00% $20,000 16.0% 2.95 22.75% $25,000 20.0% 3.80 27.00%...
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