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A consultant has collected the following information regarding Hobbit Manufacturing:
Operating income (EBIT) $600 million, Debt $0, Interest expense $0, Tax rate 35%, Cost of equity 7%, WACC 7%. The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends. Hobbit can borrow money at a pre-tax rate of 5%. The consultant believes that if the company moves to a capital structure consisting of 30% debt and 70% equity (based on market values), which would require taking on debt in the amount of $1,779.47 million, that the cost of equity will increase to 8% and the pre-tax cost of debt will remain at 6%, but the value of the firm will rise. Is the consultant correct? If the company makes this change, what will be the increase in total market value for the firm?
Distinguish between a variable cost, a fixed cost, and a mixed cost. Identify a publicly traded, well-known company, and identify what you envision would be a variable cost, a fixed cost, and a mixed cost for this company.
A colleague has evaluated projects using the firm's average discount rate, which is the discount rate on the average risk project of the firm. He produced the following report:
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describe the major components of a business model. which component do you identify as the foundation component? why?is
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On October 1m Mutch Company sold merchadise in the amount of $5,800 to Carr Company, with credit terms of 2/10,n/30. The cost of the items sold is $4,000. Mutch uses the perpetual inventory system. On October 4, Carr returns some of the merchandise. ..
Under the expectations theory, what does the slope of the yield of the yield curve reveal about the future path of interest rates?
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