1. Variable cost are 70% of Sales and Fixed cost are 100,000. The firm has 1,000,000 in debt with in interest rate of 5%. At what level of Sales will their Degree of Combined Leverage equal 4?
$750,000 b) $500,000 c) $666,667 d) $1,000,000
A corporation has 6,000,000 shares of stock outstanding at a price of $70 per share. They just paid a dividend of $2 and the dividend is expected to grow by 5% per year forever. The stock has a beta of .8, the current risk free rate is 4%, and the market risk premium is 6%. The corporation also has 400,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 7% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on adding debt until they reach their target debt ratio of 70%. They expect their cost of debt to be 8% and their cost of equity to be 12% under this new capital structure. The tax rate is 40%
2. What is the required return on the corporation's stock?
3. What is the expected return on the corporation's stock?
4. What is the yield to maturity on the company's debt?
5. What percent of their current market value capital structure is made up of equity?
6. What is their WACC using their target capital structure and expected costs of debt and equity?
7. Given the new cost of debt, what should be the new price of the bond?
8. Given the new cost of equity, what should be the new price of the stock?