Old Exam Questions  Capital Structure and Leverage
Page 30 of 31 Pages
increase by 28.80 percent. Based on this information, and assuming that a 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.
$1,500,000.00
B.
$1,891,111.11
C.
$2,232,222.22
D.
$2,373,333.33
E.
$3,164,444.44
56.
Assume that the riskfree rate is 5.00 percent, the return on the market is 14.00
percent, the tax rate is 40 percent, and that a firm’s cost of stock, using the
CAPM/SML, is 17.96 percent [HINT: you should now be able to determine the firm’s
levered beta.] Also assume that the firm’s unlevered beta has a value of 0.90 [HINT:
you should now be able to use the Hamada equations to back out the firm’s current
debt/equity ratio.] Assuming that the firm now doubles its debt/equity ratio, and using
the Hamada equations to relever the firm’s beta, determine what the firm’s new cost of
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 Spring '08
 Staff
 Balance Sheet, Debt, Leverage, Financial Ratio, Return on equity

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