18. Balon Company expects P30 million in earnings next year. Its dividend payout ratio is 40 percent, and its equity to asset ratio is 40 percent. Balon Company uses no preferred stock. At what amount of financing will there be a break point in Balons cost of capital?

a. P45 million b. P20 million c. P30 million d. P18 million

19. Calculate the DFL for a firm with EBIT of P6,000,000, fixed cost of P3,000,000, interest expense of P1,000,000, preferred stock dividends of 800,000, and a 40 percent tax rate.

a. 6.0 b. 9.0 c. 1.43 d. 1.64

20. The Board of Directors of Happy Company was unhappy with the current return on common equity. Though the return on sales (profit margin) was impressively good at 12.5 percent, the asset turnover was only 0.75. The present debt ratio is 0.40.

Ms. Sylvia Moreno, the vice-president of corporate planning, presented a proposal as follows:

The profit margin should be raised to 15 percent.

The new capital structure will be revised by raising the debt component.

The asset turnover will be maintained at 0.75.

The proposed adjustment is estimated to raise return on equity by 50 percent.

What debt ratio did Ms. Moreno propose in order to raise the return on equity (ROE) to 150 percent of the present level?

a. 0.52 b. 0.68 c. 0.61 d. 0.72