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How does leverage affect the EPS and ROE of a firm? When we increase the amount of debt financing, we increase the fixed interest expense. If we have a really good year, then we pay our fixed cost and we have more left over for our stockholders. If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders. Leverage amplifies the variation in both EPS and ROE.
The effect of financial leverage depends on EBIT. Financial leverage increases ROE and EPS when EBIT is greater than the cross-over point. The variability of EPS and ROE is increased as leverage increases.
Some of you may feel that if a company expects to achieve the break-even EBIT, it should automatically issue debt. This is a break-even point relative to EBIT and EPS. Beyond this point, EPS will be larger under the debt alternative, but with additional debt, the firm will have additional financial risk that would increase the required return on its common stock. A higher required return might offset the increase in EPS, resulting in a lower firm value despite the higher EPS.
At what price would the bonds sell? Round the answer to the nearest cent. $ Suppose that, 2 years after the initial offering, the going interest rate had risen to 16%. At what price would the bonds sell? Round the answer to the nearest cent.
Consider two metropolitan areas, one that has many small school districts and one that has only a few large school districts. - How are the efficiency and equity effects of introducing a voucher system likely to differ across these two areas?
Compute the discounted payback period for a project with the following cash flows, if the company's discount rate is 0.0950, compounded annually. The firm has a 3-year discounted payback requirement. The initial outlay is $45,000.
Bay Pines Medical Center estimates that a capitated population of 50,000 would have the following base case utilization and total cost characteristics:
the determination of the value of an investment depends on knowing at least three of the following four variablesathe
Explain how and why these actions by investors affect the yield curve. Is the shift best explained by expectations theory, liquidity premium theory, or segmented markets theory?
Boston Properties (A and B) (Harvard Business School Cases 211018 and 211041-PDF-ENG). The case introduces options pricing, payoff diagrams.
examine the circumstances that resulted in the merger or acquisition for the selected company. speculate on two 2
In what ways can a bond investor make money?
With regards to money: What are the differences between future value and present value? What considerations do you need to take when considering "time value of money"?
The return trip on the same route, now with a headwind, takes 8 hours. Assuming both remain constant, find the speed of the plane and the speed of the wind.
the 2010 balance sheet of marias tennis shop inc. showed long-term debt of 3.1 million and the 2011 balance sheet
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