Capital Structure and Leverage 14

Capital Structure - 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

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Old Exam Questions - Capital Structure and Leverage Page 14 of 31 Pages B. EBIT Breakeven = 420,000 units and NI Breakeven = 510,000 units C. EBIT Breakeven = 440,000 units and NI Breakeven = 520,000 units D. EBIT Breakeven = 460,000 units and NI Breakeven = 530,000 units E. EBIT Breakeven = 480,000 units and NI Breakeven = 540,000 units 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
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Unformatted text preview: 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% 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...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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