Capital Structure and Leverage 13

Capital Structure and Leverage 13 - D. E. 19. A company...

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Old Exam Questions - Capital Structure and Leverage Page 13 of 31 Pages D. 15.60% E. 13.64% 19. A company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit). Its variable costs equal 80 percent of sales, its fixed costs are $500,000, its interest expense is equal to $100,000, its tax rate is equal to 40%, and it has 2,000,000 shares of common stock outstanding. Assuming that the change in sales will have no effect on the company's tax rate and that we can use standard degree of leverage functions (operating, financial, total, etc.), what will be the expected dollar change in EPS if sales decrease by 20% A. -$0.02 B. -$0.03 C. -$0.04 D. -$0.05 E. -$0.06 20. A company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit). Its variable costs equal 80 percent of sales ($4 per unit), its fixed costs are $500,000, its interest expense is equal to $100,000, its tax rate is equal to 40%, and it has 2,000,000 shares of common stock outstanding. The firm is considering a new type of machine for its existing production lines. With the new machine, fixed costs
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