HW_3_Questions_Chapters_16_17[1]

# HW_3_Questions_Chapters_16_17[1] - HW 3 Chapter 16 Use the...

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HW 3 Chapter 16, 17 Chapter 16 Use the following information to answer questions 1-5: Suppose # of units sold (Q) = 1,000,000 Price per unit (P) = \$10 Variable cost (V) = \$4 Fixed operating costs =250,000 Fixed financing cost = 100,000 Tax rate is 35%. 1. DOL? 2. DFL? 3. DTL? 4. How does net income change if unit sales increases by 3%? 5. How does financial leverage affect net income given a 1% change in operating income? 6. Cony Inc. produces platforms for home televisions. If they produce 40 million units, it estimates that it can sell them \$80 each. The variable costs are \$65 per unit, whereas the fixed production costs are \$1 billion. What is the operating breakeven? 7. Company A has zero debt and the operating income is \$25,000. Company A now issues \$100,000 of debt at an 8% interest rate. What are the values of the company with and without debt? Assume cost of capital=10% and a 35% tax rate.

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Chapter 17 1. Assume that net income = \$500, Corporate tax rate = 35%, Dividend policy = 100% payout, Shareholder tax rate on dividends=25%. Calculate the implied tax rate on the dividends received by investors. 2. JC Industries plans to borrow \$12 million to repurchase shares. Based on the following calculate the EPS after the buyback. Share price at time of buyback: \$50 EPS before buyback: \$2 After-tax cost of borrowing: 5% Shares outstanding: 2 million Planned buyback: 200,000 shares 3. CHI is evaluating the impact of a buyback of \$10 million dollars or 10% of the market value of its common stock. CHI’s d ebt to equity is currently 25/75. What is the impact on the capital structure if they buyback with all debt? 4. Cash Cow International paid a quarterly dividend of \$0.075 a share. a. Connect each of the following dates to the correct term: May 7 record date June 6 Payment date June 7 Ex-dividend date June 11 Last with dividend date July 2 - declaration date b. On one of these dates the stock price is likely to fall by the amount of the dividend. Which date and Why? c. The stock price in early January was \$27. What the prospective dividend yield?
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