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Unformatted text preview: rate will remain at 40 percent. If the companys forecast is correct, how much will net income increase or decrease, as a result of the expansion? a. No change b. $ 40,000 increase c. $ 60,000 increase d. $100,000 increase e. $180,000 increase i . MVA Answer: c Diff: E MVA = (Shares outstanding)(Stock Price) - Total common equity. MVA = (2,000,000)($15) - $40,000,000 MVA = -$10,000,000. ii . Rate of interest Answer: c Diff: M Long-term interest = ($13,000,000)(0.08) = $1,040,000. Short-term interest = $1,300,000 - $1,040,000 = $260,000. Short-term interest rate = $260,000/$1,546,000 = 16.82% 16.8%. iii . Calculating change in net income Answer: c Diff: M R Set up an income statement: Sales $1,000,000 Operating costs excl. dep. and amort. 700,000 EBITDA $ 300,000 Depreciation and amortization 50,000 EBIT $ 250,000 Interest 150,000 EBT $ 100,000 Taxes (40%) 40,000 Taxes = 0.4($100,000) = $40,000. Net income $ 60,000...
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This note was uploaded on 08/04/2011 for the course COMM 101 taught by Professor Sy during the Spring '11 term at USC.
- Spring '11