1. UNIT 9 SOLVED PROBLEMS

2. PROBLEM#1 APEX Electronics will produce 70,000 IPODS next year. Variable costs will equal 50% of sales, while fixed costs will total $100,000. At what price must each stereo be sold for the company to achieve an EBIT of $250,000? EBIT = PQ – VQ – F $250,000 = P*70,000 -.5P * 70,000 - $100000 $350,000 = 70,000P – 35,000P 350,000=35000P 350,000/35000=$10

3. PROBLEM#2 Firms ALPHA and BETA are identical except for their level of debt and the interest rates they pay on debt. Each has $6 million in assets, $800,000 of EBIT, and has a 40% tax rate. However, firm A has a debt-to-assets ratio of 30% and pays.04 interest on its debt, while Firm B has a 60% debt ratio and pays only 8% interest on its debt. What is the difference between the two firms' ROEs?

4. PROBLEM#2

5. PROBLEM#3 TESCO Corp. has a capital budget of $2,000,000, but it wants to maintain a target capital structure of 50% debt and 50% equity. The company forecasts this year’s net income to be $1,600,000. If the company follows a residual dividend policy, what will be its dividend paid?

6. PROBLEM#3 3. With a capital budget of $2M and a capital structure that is 50% equity requires $1,000,000 in retained earnings. This means the dividend that could be paid out of NI of $1,600,000 is: Dividends = NI – [(target equity ratio)(Total capital budget)] Dividends = $1,600,000 – [50% * $2,000,000] = $600,000

7. PROBLEM#4 STAR Inc. recently completed a 3-for-2 stock split. Prior to the split, its stock price was $120 per share. The firm's total market value was unchanged by the split. What was the price of the company’s stock following the stock split? 120*2/3=$80 price post split

8. PROBLEM#5 BARD CORP recently completed a 3-for-1 stock split. Prior to the split its stock price was $150 per share. The firm's total market value increased by 15% as a result of the split What was the price of the company’s stock following the stock split?

9. PROBLEM#5 EXPLANATION: 150/3 = 50 x 1.15 = $57.50 Stock split factor 3 Pre-split stock price $150 Market reaction 15% Post-split stock price $57.50

10. PROBLEM#6 WANG Enterprises has $4 million in assets, $800,000 of EBIT, and has a 30% tax rate. The firm also has a debt-to-assets ratio of 30% and pays 12% interest on its debt. rate. The firm also has a debt-to-assets ratio of 30% and pays 12% interest on its debt. What is WANG's ROE?

11. PROBLEM#6 ASSETS $4,000,000 DEBT RATIO 0.3 DEBT $1,200,000.00 EQUITY $2,800,000.00 INT RATE 0.12 INT PAID $144,000.00 EBIT $800,000 CALCULATE Net income$800,000 deduct Interest expense$144,000 Earnings after Interest$656,000 TAX RATE 30%$196,800.0 NET INCOME AFTER TAXES$459,200.0 Calculate ROE=NI/EQUITY0.164

12. PROBLEM#7 Brandi Co. has an unlevered beta of 1.10. The firm currently has no debt, but is considering changing its capital structure to to be 30% debt and 70% equity. If its corporate tax rate is 40%, what is Brandi's levered beta?

13. PROBLEM#7