1. In terms of break-even analysis, which of the following is true? a. All else

Question

1. In terms of break-even analysis, which of the following is true?

              a. All else equal, a decrease in variable costs will increase the break-even quantity

               b. All else equal, an increase in the selling price will increase the break-even quantity

              c. All else equal, a decrease in the selling price will decrease the break-even quantity

             d. All else equal, an increase in fixed costs will increase the break-even quantity

2. JTC is in the process of setting its target capital structure. The CFO believes that the option debt-to-capital ratio is somewhere between 30% and 70%. The JTC staff has compiled the following projections for EPS and the WACC at various debt levels. Assuming that the firm used only debt and common equity, what is JTC’s optimal capital structure?

       Debt/Capital Ratio                  Projected EPS             WACC

                 30%                                 $1.10                      8%        

           40%                                 $1.20                          7%

                 50%                                 $1.25                          8.5%   

                 60%                                 $1.20                          9%

               70%                                 $1.15                          9.5%

a. 60%

b. 40%

c. 50%

d. 70%

3. Firms Haley and Laura are identical except for their financial leverage ratios and interest rates they pay on debt. Each has $10 million in invested capital, has $4 million in EBIT, and is in the 50% federal-plus-state tax bracket. Haley, however, has a debt-to-capital ratio of 60% and pays 10% interest on its debt, whereas Laura has a 40% debt-to-capital ratio and pays 5% on its debt. Neither firm uses preferred stock in its capital structure. What is the ROE for each firm?

a. The ROE for Haley is 42.5% and the ROE for Laura is 31.7%

b. The ROE for Haley is 24.5% and the ROE for Laura is 26.7%

c. The ROE is 40% for each firm

d. The ROE is 20% for each firm

4. Holding Motors has $20 million on assets, which were financed with $6 million of debt and $14 million in equity. Holding’s beta is currently 1.4, and its tax rate is 30%. Using the Hamada equation, what is Holdings unlevered beta?

                a. 0.93

                b. 0.78

               c. 1.24

                d. 1.08

5. Hurricane Software is trying to establish its optimal capital structure. Its current capital structure consists of 20% debt and 80% equity; however, the CEO believes that the firm should use more debt. The risk-free rate is 2%, the expected return on the market is 12% and the firms tax rate is 60%. Currently, Hurricane’s cost of equity is 13%. What would be Hurricane’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity?

                a.18%

                b.14%

                c.12%

                d.16%

Explanation / Answer

As per chegg guidelines when there are more than one question then we have to answer first question.

Break even quantity= Fixed cost/contribution per unit

Contribution per unit= selling price - variable cost per unit

1) so when we will decrease the variable cost then it will lead to increase in contribution as a result of which break even quantity will decrease.

2) an increase in selling price will increase contribution per unit as a result of which break even quantity will decrease.

3) a decrease in selling price will lead to decrease contribution as a result of which break even quantity will increase.

4) an increase in fixed cost will always increase the break even quantity

So correct answer is d) all else equal, an increase in fixed cost will increase break even quantity.

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