1. T/F The board should look at Cloud Cos corporate debt YTM to get an idea of their current debt coupon cost and can add a historic equity risk premium or spread to that to derive their cost of equity

2. Fred and Bob own a medium size water delivery firm named W Corp. and they are each 50% partners. They have a 10,000 square foot factory with rent of 12k per month. They currently lease 3 trucks at $850 each per month and have 3 salaried employees they pay 25k each annually to operate their trucking routes. Sales are 800k per year, CM is 500k per year and EBIT is 250k. They have no debt.

1. What is their DOL?
2. How can the DOL be lowered?
3. What will most likely happen to the firm if sales drop by half in regards to DOL and chapter 11 risk

7. Sales are booming so they want to expand by buying a competitor who is looking to retire called Z Corp. They will do this by using debt a combination of bank debt and a private debt offering at an average rate of 8%. The EBIT for the new firm is 200k and the interest cost to purchase is 100k.

A. What is the DFL of Z Corp?

B. How can the DFL attributed to W Corp. be lowered if they buy Z Corp?

4. C. What will most likely happen W Corp if sales of Z Corp drop by half, in regards to DFL and chapter 11 risk

8, What is the DTL in #6 and 7 combined using pre-purchase DOL and post purchase DFL, and what will happen to EPS if Sales increase by 20% or fall by 20%?