This preview shows page 1. Sign up to view the full content.
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
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '08
 Staff
 Leverage

Click to edit the document details