Investments Final
Quiz 2 Corporate Finance NAME ______________________
Apring 2013 2012 70 pts Show all work MC=5pts each
1. Find the EPS (y-axis) // EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and show all the points including crossover, where line crosses y-axis, and the three EBITs below 30pts
Assets = $3,000,000 Stock Price = $20 Interest Expense = 12%
PLAN I
D/E = 1.1
Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________ _________ __________
EPS __________ _________ __________
PLAN II
D/E = 1.9
Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________ _________ __________
EPS __________ _________ __________
Crossover EBIT = ____________
If you predict EBIT to be $300,000, which PLAN would you choose? _________
Draw Graph
2. What three factors are important to consider in determining a target debt to equity ratio?
A. Taxes, asset types, and pecking order and financial slack
B. Asset types, uncertainty of operating income, and pecking order and financial slack
C. Taxes, financial slack and pecking order, and uncertainty of operating income
D. Taxes, asset types, and uncertainty of operating income
E. None of the above.
3. Using the CAPM to calculate the cost of capital for a risky project assumes that:
A. using the firm 's beta is the same measure of risk as the project.
B. the firm is all-equity financed.
C. the financial risk is equal to business risk.
D. Both A and B.
E. Both A and C.
4. Your corporation has a Book Value of long-term debt = $1,000,000. The bonds were issued with a original maturity of 20 years
Apring 2013 2012 70 pts Show all work MC=5pts each
1. Find the EPS (y-axis) // EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and show all the points including crossover, where line crosses y-axis, and the three EBITs below 30pts
Assets = $3,000,000 Stock Price = $20 Interest Expense = 12%
PLAN I
D/E = 1.1
Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________ _________ __________
EPS __________ _________ __________
PLAN II
D/E = 1.9
Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________ _________ __________
EPS __________ _________ __________
Crossover EBIT = ____________
If you predict EBIT to be $300,000, which PLAN would you choose? _________
Draw Graph
2. What three factors are important to consider in determining a target debt to equity ratio?
A. Taxes, asset types, and pecking order and financial slack
B. Asset types, uncertainty of operating income, and pecking order and financial slack
C. Taxes, financial slack and pecking order, and uncertainty of operating income
D. Taxes, asset types, and uncertainty of operating income
E. None of the above.
3. Using the CAPM to calculate the cost of capital for a risky project assumes that:
A. using the firm 's beta is the same measure of risk as the project.
B. the firm is all-equity financed.
C. the financial risk is equal to business risk.
D. Both A and B.
E. Both A and C.
4. Your corporation has a Book Value of long-term debt = $1,000,000. The bonds were issued with a original maturity of 20 years