financequiz9

# 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
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 %
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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