This preview shows pages 1–3. Sign up to view the full content.
HW 3 Chapter 16, 17
Chapter 16
Use the following information to answer questions 15:
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.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentChapter 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
Aftertax 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
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '09
 LI

Click to edit the document details