Calculate degree of financial leverage

Assignment Help Finance Basics
Reference no: EM132234817

1.) A firm has the following information for the last two years. Calculate its degree of financial leverage.

This year Last year

Sales $1,500,000 $1,300,000

Operating costs $900,000 $800,000

Net income $150,000 $120,000

Number of shares outstanding 50,000 50,000

2.) Allegra Inc. has one million shares outstanding. The company is considering the issue of debt of $15 million. The interest rate on this new debt issue will be 8%, and the number of shares after the debt issue will be reduced to 500,000. Given a corporate tax rate of 40%, what is the EBIT that will cause the firm's earnings per share to be indifferent between issuing and not issuing debt?

3.) Mrs. Abecrombus has $2,000 to invest. There are only two possible investments: a levered firm with a D/E ratio of 1 and a share price of $20, and a risk-free asset with a return of 10%. If Mrs. Abecrombus prefers a D/E ratio of 2, how can she use homemade leverage to achieve her goal?

Select one:

a. borrow $2,000 at the risk-free rate and buy 200 shares

b. lend $2,000 at the risk-free rate and sell 100 shares

c. lend $1,000 at the risk-free rate and sell 50 shares

d. borrow $1,500 at the risk-free rate and buy 175 shares

e. borrow $1,000 at the risk-free rate and buy 150 shares

4.) Async Inc. and Sync Corp. both have the same EBIT of $3 million and tax rate of 30%. Async is all-equity financed with a cost of capital of 12%, whereas Sync has debt of $7.5 million. What is Sync's firm value using the M&M Proposition?

5.) You are a business analyst with a big investment bank, and you are evaluating the equity risk, business risk, and financial risk of Abilon's Inc. You went online and found that the industry consensus on Abilon's equity risk is 1.5. You also know that the company's debt-equity ratio is 2. What is Abilon's estimated business and financial risk based on the model: βE = β A(1 + D/E)?

Reference no: EM132234817

Concern regarding royalty income

What is a potential concern regarding royalty income from a retiring musician that may need to be addressed? What investment class (equity, fixed income, real estate etc.) do

Determine the current stock price

Suppose that a fifteen year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12%, with quarterly compounding,

Under armour cost of equity-capm-ddm-apt

Describe the challenge of estimating or coming with the good feel for "cost of equity capital" or rate of return that you feel Under Armour investors require as the minimum r

Evaluation of company from the metrics

Suppose You are working at BM Corporation has paid off in many thousand of dollars of profit sharing to you this year. You know it is best to diversity your investment and not

What is the probability that a randomly selected family

A research firm selected 100 families and found that the mean amount is $500 with a standard deviation of $75. What is the probability that a randomly selected family of four

What is the discount

A newly issued T bill with a $10,000 par value sells for $9,950, and has a 90 day maturity. What is the discount? A) 10.26 percent B) 0.26 percent C) 20.00 percent D) 2.00 p

Governmental fund financial statements

Are governmental fund financial statements sufficient for users seeking information about operational accountability? If so, why? If not, what type of information is needed to

Annuity-perpetuity

(Annuity - perpetuity) 3 years from now (at t=3) you will begin to receive cash flows of $1000 per year. These cash flows will continue forever. If the discount rate is 5%,

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd