KIC000192 - Final Exam Sample Problems 1 Explain homemade...

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Unformatted text preview: Final Exam Sample Problems 1. Explain homemade leverage and why it matters. . mv.e£tcrS eM Ct"-e:xt£, \J..ve¥ODf b1 c..e.\ltl/'\rJ...-tlru.-It- SV10..re..')jV1 0- ~\)V"'~d-¥ \((Y \ \ '::lorrow'S rnoY\Jbf C\nd II1 V Q ,tIV l O J 1 unlt\lu-Pd- \)Vt.,\Y"Y"\C l:t,.e.h/ coou\J&t'.>mo..-t lo.J?l\::a..\ 9Yut.tIJrt ~ Io.~ ro-e\Wct 2. When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels ofEBlT because: a. interest payments on debt vary with EBIT levels. b. interest payments on debt stay fixed, leaving less income to be distributed over less shares. @ interest payments on debt stay fixed, leaving more income to be distributed over less shares. d. interest payments on debt stay fixed, leaving less income to be distributed over more shares. e. interest payments on debt stay fixed, leaving more income to be distributed over more shares. ) 3. Petunia Inc. has an unlevered cost of capital of 10%, a tax rate of 34%, and expected earnings before interest and taxes of $1,600. The company has $3,000 in bonds outstanding that have an 8% coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity? U""M c"-'...
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KIC000192 - Final Exam Sample Problems 1 Explain homemade...

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