financequiz9 - 1 Question Millman Electronics will produce...

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1. Question: Millman Electronics will produce 60,000 stereos next year. Variable costs will equal 50% of sales, while fixed costs will total $120,000. At what price must each stereo be sold for the company to achieve an EBIT of $95,000?
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Your Answer: $6.5 7 $6.8 7 $7.1 7 C ORR ECT $7.4 7 $7.7 7
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Instructor Explanation: EBIT = PQ – VQ – F $95,000 = P*60,000 - .5P * 60,000 - $120000 $215,000 = 60,000P – 30,000P $215,000 = 30,000P P = $7.17 Points Received: 4 of 4 Comments: 2. Question: Firms A and B are identical except for their level of debt and the interest rates they pay on debt. Each has $2 million in assets, $400,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 50% and pays 12% interest on its debt, while Firm B has a 30% debt ratio and pays only 10% interest on its debt. What is the difference between the two firms' ROEs?
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Your Answer: 1.25 % 1.91 % 2.23 % C ORR ECT 2.64 % 2.86 %
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Explanation: First we need to calculate the NI of the two firms: Firm A: $400,000 – ($1M * .12) = $280,000 * (1 - .40) = $168,000 Firm B: $400,000 – ($600,000 * .10) = $340,000 * (1 - .40) = $204,000 Firm A equity = $2M * .50 = $1M Firm A ROE = $168,000 / $1M = 16.80% Firm B equity = $2M * .70 = $1.4M Firm B ROE = $204,000 / $1.4M = 14.57% Difference in ROEs = 16.80% - 14.57% = 2.23% Points Received: 4 of 4 Comments: 3. Question: The firm’s target capital structure is consistent with which of the following?
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This note was uploaded on 08/06/2011 for the course MT 217 taught by Professor Finance during the Spring '11 term at Kaplan University.

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financequiz9 - 1 Question Millman Electronics will produce...

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