1. An understanding of cost behavior is useful to managers for: A. Flexible budgeting B. Inventory costing and income determination C. Absorption costing D. External reporting.
2. Explain the Dupont equation. What is its purpose? Solve for ROE if profit margin is 5.2, total asset turnover is 1.65 and the equity multiplier is 1.83.
3. The market value of a corporation's common stock is $40 million and the market value of its risk-free debt is $60 million. The beta of the company's common stock is 0.8 and the expected market risk premium is 10 percent. If the Treasury bill rate is 6 percent, what is the firm's cost of capital? (Assume no taxes.)