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 aftertax 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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 Spring '08
 Staff
 Debt, Leverage, Earnings before interest and taxes, perc ent

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