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Capital Structure and Leverage 27

Capital Structure and Leverage 27 - E 48 Assume that your...

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Old Exam Questions - Capital Structure and Leverage Page 27 of 31 Pages E. $918,842.86 48. Assume that your company has sales of $10,000,000 ($10 per unit), variable costs of $7,500,000, fixed costs of $1,500,000, and return on equity (ROE) of 14.50%. If the firm’s degree of financial leverage is equal to 1.4, then determine what the projected ROE will be for the coming year, assuming a 20% increase in sales and no change in the firm’s balance sheet (i.e., assets, liabilities, and the number of shares outstanding remain constant). A. 21.91% B. 26.02% C. 23.28% D. 27.39% E. 24.65% 49. Assume that your company is an all-equity firm with 1,000,000 shares outstanding. The company’s EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year; its growth is zero, its earnings per share equals its dividends per share, and the company’s tax rate is 40. The company is considering issuing $8.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm’s cost of this debt (their annual coupon rate) would be 6 percent. The risk-free rate in the economy is 4 percent, and the market risk
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