Capital Structure and Leverage 21

Capital Structure - change in sales will have no effect on the company’s tax rate A 42.50 B 35.00 C 40.00 D 32.50 E 37.50 37 Assume that Firm A

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Old Exam Questions - Capital Structure and Leverage Page 21 of 31 Pages be able to repurchase its stock at the current price of $30.00 per share. Assume now that the market does not anticipate and the firm is able to buy the shares back at $30.00 per share. Determine what the ultimate equilibrium price will eventually be after all transactions are finally completed. A. $31.23 B. $31.41 C. $31.29 D. $31.47 E. $31.35 36. Assume that a company generates $5,000,000 in sales (1,000,000 units sold at a price of $5 per unit), that its variable costs equal 80 percent of sales, its fixed costs are $500,000, its tax rate is equal to 40%, and that it has 2,000,000 shares of common stock outstanding. The company estimates that if its sales were to increase 10 percent, its net income and EPS would increase 25.0 percent. Determine by how much net income will increase (percent) if EBIT increases by 30%. (Assume that the
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Unformatted text preview: change in sales will have no effect on the company’s tax rate.) A. 42.50% B. 35.00% C. 40.00% D. 32.50% E. 37.50% 37. Assume that Firm A is an all-equity firm with total assets of $1,000 and the following distribution of EBIT for the coming year: Economy Firm A (Unlevered) Bad Average Good Probability 30% 40% 30% EBIT $120 $150 $180 Interest $0 $0 $0 EBT $120 $150 $180 Taxes (40%) -$48 -$60 -$72 Net Income $72 $90 $108 BEP 12.0% 15.0% 18.0% ROA 7.2% 9.0% 10.8% ROE 7.2% 9.0% 10.8% As you can calculate, the standard deviation of the ROE distribution is 1.39 percent. Now assume that the firm plans to issue $400 of debt, at an interest rate of 10 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $600 of equity). Determine the standard deviation of the new ROE distribution if the firm does issue this debt....
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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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