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Capital Structure and Leverage 18

Capital Structure and Leverage 18 - A B C D E 28 A company...

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Old Exam Questions - Capital Structure and Leverage Page 18 of 31 Pages A. 12.10% B. 12.30% C. 12.50% D. 12.20% E. 12.40% 28. A company generates $5,000,000 in sales by selling 1,250,000 units at $4 per unit. Its variable costs equal 75 percent of sales and its fixed costs are $750,000. Therefore, the company’s operating income (EBIT) equals $500,000. The company estimates that if its sales were to increase 10 percent, its net income and EPS would increase 40.0 percent. Based on this information, determine the current amount of the company’s interest expense. (Assume that the change in sales will have no effect on the company’s tax rate, total assets, or number of shares outstanding.) A. $185,000 B. $177.500 C. $182,500 D. $180,000 E. $187,500 29. Assume that (1) your company pays all of its after-tax earnings out in the form of dividends, (2) it currently has $0 of debt, (3) its EBIT is $4,000,000, (4) its tax rate is 40 percent, (5) its current cost of equity is 10 percent, and (5) it has 500,000 shares outstanding. Also assume that the company’s investment bankers have told it that it
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