Question
Compton Corporation currently has no debt in its capital structure .As an unlevered firm, its cost of equity is 9 percent.It is considering substituting $40,000
Compton Corporation currently hasno debt in its capital structure.As an unlevered firm, its cost of equity is 9 percent.It is considering substituting $40,000 in debt at 4 percent interest. The EBIT for the firm is $15,000 under either scenario, and the tax rate is 35 percent. According to M&M with taxes,how much value will be addedto the firm by substituting $40,000 in debt?
Group of answer choices
a. $8,000
b. $14,000
c. $18,000
d. $22,000
10. Arthur Johnson Inc.'s EBIT is $500,000; the company's interest expense is $200,000. What is the company'sdegree of financial leverage?
Group of answer choices
a. 1.00
b. 1.33
c. 1.67
d. 2.00
Compton Corporation currently hasno debt in its capital structure.As an unlevered firm, its cost of equity is 10 percent.It is considering substituting $40,000 in debt at 4 percent interest. The EBIT for the firm is $15,000 under either scenario, and the tax rate is 35 percent.According to M&M with taxes,what is the debt/equity ratio for the levered firm?
Group of answer choices
a. .24
b. .32
c. .41
d. .56
13.Allison Radiosmanufactures a complete line of radio and communication equipment for law enforcement agencies. Theselling priceof its finished product is $28 per unit. Thevariable costfor each unit is $12.Fixed costsare $40,000 per year. What is the dollar profit (or loss) if the firm sells 4,000 units?
Group of answer choices
a. $24,000
b. $35,400
c. $46,000
d. $54,000
15.Apple Recordsis a company worth $21,600,000.The company is financed entirely by common stock: 480,000 shares at $45 per share.Thecompany is planning on substituting debt for equity, buying back shares and issuing $5,400,000 of 3 percent debt.The tax rate is 35 %.Thebeta for the unlevered firmis 1.00.What will the beta of the new company be if the company goes through with the plan to addfinancial leverage?
Group of answer choices
a.1.152
b.1.194
c.1.225
d.1.268
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