Capital Structure and Leverage 30

Capital Structure and Leverage 30 - increase by 28.80...

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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 risk-free 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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