Show Solutions and explain how did they solve (Cost of Capital, Financial Leverage and Capital Structure)
Complete the Requirements of each problem
Real's capital structure consists of: (1) 20% accounts payable and other non-interest-bearing debt, (2) 45% bank debt on which they pay 10% interest, (3) 5% preferred stock, (4) 15% retained earnings, and (5) 15% stock at par plus additional paid in capital. They are in the 40% tax bracket. They have outstanding preferred stock with a P75 coupon rate for every P1,000 of par value. They have estimated their cost of common equity at 13.8%.
What is their present WACC?
Carolina Fastener, Inc., makes a patented marine bulkhead latch that wholesales for P6.00. Each latch has variable operating costs of P3.50. Fixed operating costs are P60,000 per year. The firm pays P12,000 interest and preferred dividends of P8,500 per year. At this point, the firm is selling 30,000 latches per year and is taxed at a rate of 30%.
Compute for the DOL, DF, and DTL.
If the sales increased by 25%, by how much is the increase or decrease in the EPS?
If the sales decreased by 20%, by how much is the increase or decrease in the operating profit?
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