Capital Structure and Leverage 15

Capital Structure and Leverage 15 - A 16 B 14 C 15 D 12 E...

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Old Exam Questions - Capital Structure and Leverage Page 15 of 31 Pages A. $1.11 B. $1.31 C. $1.51 D. $1.71 E. $1.91 23. Assume that your firm had net income (earnings) this last year of $1,500,000 and had 1 million common shares outstanding with a book value of $15 per share. Now assume that you expect sales to increase by 20 percent during the coming year and that your firm currently has a degree of operating leverage equal to 1.25 and a degree of financial leverage equal to 2.00. Given this information, and assuming that there will be no change in total assets or the number of shares outstanding, calculate the expected ROE for the coming year (using the initial book value of equity).
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Unformatted text preview: A. 16% B. 14% C. 15% D. 12% E. 13% Income Statement Starting Values Sales $60,000 Fixed Costs -$10,000 Variable Costs -$30,000 EBIT $20,000 Interest $0 EBT $20,000 Taxes (40%) -$8,000 Net Income $12,000 Other Information Year 0 Dividend Payout 100% Growth 0% EPS $3.00 DPS $3.00 Current Market Price $20.00 Dividend Yield 15% Risk-free rate 8% Market Risk Premium 5% Amount Borrowed Cost of Debt Equity Beta Cost of Equity $0 0.0% 1.40 15.00% $10,000 10.0% 1.50 15.50% $20,000 13.0% 1.60 16.00% $25,000 15.0% 2.00 18.00% $30,000 18.0% 2.95 22.75% $35,000 20.0% 3.80 27.00%...
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