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# fm16 3 - P =[S(D – D n =[\$600(\$300 – \$0/30 = \$30 16-6 n...

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. Answers and Solutions: 16 - 3 SOLUTIONS TO END-OF-CHAPTER PROBLEMS 16-1 Q BE = F/(P – V) = \$500,000/(\$75 - \$50) = 20,000. 16-2 If w d = 0.2, then w ce = 1 – 0.2 = 0.8. So D/S = w d /w e = 0.2/0.8. b U = b/[1 + (1-T)(D/S)] = 1.15/[1 + (1-0.40)(0.2/0.8)] = 1.0. 16-3 If the company had no debt, its required return would be: r s,U = r RF + b U RP M = 5.5% + 1.0(6%) = 11.5%. With debt, the required return is: r s,L = r RF + b L RP M = 5.5% + 1.6(6%) = 15.1%. Therefore, the extra premium required for financial risk is 15.1% - 11.5% = 3.6%. 16-4 S = (1 – w d )(V op ) = (1 – 0.4)(\$500) = \$300 million. 16-5 S = (1 – w d )(V op ) = (1 – 1/3)(\$900) = \$600 million.
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Unformatted text preview: P = [S + (D – D )] / n = [\$600 + (\$300 – \$0)]/30 = \$30. 16-6 n = n – (D/P) = 60 – (\$150/\$7.5) = 60 – 20 = 40 million. 16-7 a. Here are the steps involved: (1) Determine the variable cost per unit at present, V: Profit = P(Q) - FC - V(Q) \$500,000 = (\$100,000)(50) - \$2,000,000 - V(50) 50(V) = \$2,500,000 V = \$50,000. (2) Determine the new profit level if the change is made: New profit = P 2 (Q 2 ) - FC 2- V 2 (Q 2 ) = \$95,000(70) - \$2,500,000 - (\$50,000 - \$10,000)(70) = \$1,350,000. (3) Determine the incremental profit: Profit = \$1,350,000 – \$500,000 = \$850,000....
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