1. A project requires an initial investment of $14,000,000 and is depreciated straight-line to zero salvage over its 10-year life. The project produces items that sell for $2,300 each, with variable costs of $750 per unit. Fixed costs are $1,200,000 per year. If the Company is selling 4200 units of this product, what is Degree of Operating Leverage (DOL)?
2. KCEP Co. hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 5.75%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.25% over a firm's own cost of debt. What is an estimate of the firm's cost of equity from retained earnings?