Exam 14: Capital Structure Management in Practice

Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30.The firm has $10 million in bonds outstanding with a coupon interest rate of 9%.KH has 200,000 shares of common stock outstanding.The firm has revenues of $32.2 million and its marginal tax rate is 40%.Compute KH's degree of combined leverage.

Midwest Can Company is considering opening a new plant in St.Louis that is expected to produce an average EBIT of $3 million per year.To finance this new plant, Midwest is considering two financing plans.The first plan is to sell 600,000 shares of common stock at $15 each.The second plan is to sell 200,000 shares of common stock at $15 each and $6 million of 13 percent long-term debt.If Midwest has a marginal tax rate of 40 percent, what is the EBIT-EPS indifference point for this plant?

Weis Products has fixed operating costs of $20 million and a variable cost ratio of 0.55.Weis has 4 million common shares outstanding and a marginal tax rate of 45%.What is Weis's degree of operating leverage at an expected sales level of $150 million?

Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30.The firm has $10 million in bonds outstanding with a coupon interest rate of 9%.KH has 200,000 shares of common stock outstanding.The firm has revenues of $32.2 million and its marginal tax rate is 40%.Compute KH's degree of financial leverage.

Chemex has a cash and marketable securities balance of $200 million.Management expects free cash flows of $320 million during the coming year.If management is considering a restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year?

A firm which has a 2.5 DOL (degree of operating leverage) would find that an 8% increase in EBIT would result from a increase in sales.

The total variability of the firm's EPS associated with a change in sales is an indication of combined leverage and is best measured by

Last year Avator's operating income (EBIT) increased by 22 percent while its dollar sales increased by 15%.What is Avator's degree of operating leverage (DOL)?

Given the following financial data for Cosmos, compute the firm's degree of combined leverage.

In using Nestle Corporation as a model, when a subsidiary is first formed, about one-half of the financing needed to acquired fixed assets comes from:

What are the effects of leverage on shareholder wealth and the cost of capital?

A firm that employs relatively large amounts of labor- saving equipment in its operations will have a relatively degree of operating leverage.

If a firm sees its EPS increase 27% on a 12% increase in sales, what is the firm's DOL.During the same period the firm saw its EBIT increase only 8%.

Dagger Company has a current capital structure consisting of$60 million in long-term debt with an interest rate of 9% and $60 million in common equity (12 million shares).The firm is considering an expansion plan costing $23 million.The expansion plan can be financed with additional long-term debt at a 12% interest rate or the sale of new common stock at $8 per share.The firm's marginal tax rate is 40%.Determine the indifference level of EBIT for the two financing plans.

Onyx expects to have an EBIT of $240,000 with a standard deviation of $110,000.The distribution of operating income is approximately normal.If Onyx has interest expenses of $50,000, what is the probability that it will have an operating income that is below $0?

A negative DOL indicates the percentage in operating losses that occurs as the result of a 1% increase in output.

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below: Both companies have $500 million in total assets and both have a 40% marginal tax rate.What is the EPS for Jackson at an EBIT level of $50 million?

What would be the degree of financial leverage for Under A Cloud Skydiving School if the company will have earnings before interest and taxes of $750,000 which would be a 15% increase? The firm had EPS of $1.25 but, with the increased earnings, anticipates paying $1.37.

Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70.The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent.ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding.ITC is in the 50 percent corporate income tax bracket.Forecasted sales for next year are $9 million.What is ITC's degree of operating leverage at a sales level of $9 million?

The degree of combined leverage is equal to the degree of operating leverage the degree of financial leverage.