1. Blue Sky Corporation is trying to determine an appropriate capital structure. It knows that, as its financial leverage increases, its cost of borrowing will eventually increase as will the required rate of return on its common stock.

   The company has made the following estimates for various financial leverage ratios with some missing numbers.

   (Please use the Ki directly in the calculation of Ko)

   The market return is 10%, the risk-free rate is 5%, the tax rate is 40%.

   Assume CAPM is the right model to calculate the required rate of return on its common stock.

   What is the optimal capital structure?

   	A.	B/S=0.0526
   	B.	B/S=0.1111
   	C.	B/S=0.1765
   	D.	B/S=0.3333
   	E.	None of above
   	F.	B/S=0.2500

10 points

QUESTION 5

1. Trout Ltd. produces a single product that has a contribution margin of 60% per unit and sold 500,000 units last year. Trout has a degree of operating leverage of 1.60 and a degree of financial leverage of 1.20 for the current year. If the sales volume were to increase by10% this coming year, what would be the expected percentage increase in earnings per share (rounded to the nearest percent)?

   	A.	19%
   	B.	12%
   	C.	15%
   	D.	6%

10 points

QUESTION 6

1. In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:

   (Please select the most appropriate option)

   	A.	Fall.
   	B.	Still be indeterminate until interest and preferred dividends paid are known.
   	C.	Stay the same.
   	D.	Rise.