Capital Structure and Leverage 26

Capital Structure and Leverage 26 - of the resulting ROE...

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Old Exam Questions - Capital Structure and Leverage Page 26 of 31 Pages C. $27.47 D. $28.21 E. $27.10 46. 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 $150.00 $180.00 $210.00 Interest $0.00 $0.00 $0.00 EBT $150.00 $180.00 $210.00 Taxes (40%) -$60.00 -$72.00 -$84.00 Net Income $90.00 $108.00 $126.00 BEP 15.00% 18.00% 21.00% ROA 9.00% 10.80% 12.60% ROE 9.00% 10.80% 12.60% As you can calculate, the variance of the ROE distribution is 0.01944 percent (standard deviation of 1.394274 percent). Now assume that the firm plans to issue $300 of debt, at an interest rate of 8 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $700 of equity). As you will be able to calculate, the variance
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Unformatted text preview: of the resulting ROE distribution will be 0.0396735 percent (0.0396735% = 0.000396735). Given this information, and using the concept of Z-scores, determine the probability that the actual observed ROE will be less than 10.0 percent. A. 5.29% B. 4.55% C. 5.66% D. 4.92% E. 6.03% 47. Assume that a company generates $12,750,000 in sales by selling 2,550,000 units at $5 per unit. The firm has variable costs equal to 75 percent of sales, interest expense of $400,000, and a degree of financial leverage of 2.25. The company estimates that if its sales were to increase 10 percent, its return on equity would increase by 31.5 percent. Based on this information, and assuming that the change in sales will have no effect on the company’s tax rate, total assets, or number of shares outstanding, determine the current amount of the company’s fixed costs. A. $902,585.72 B. $926,971.43 C. $910,714.29 D. $935,100.00...
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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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