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Home / Questions / q1__XYZ company expects in the coming year: sales of 40,000 units at $10 per unit, variabl...

q1__XYZ company expects in the coming year: sales of 40,000 units at $10 per unit, variable operating costs of $4 per unit, fixed operating costs of $30,000, interest of $50,000, and preferred stock

q1__XYZ company expects in the coming year: sales of 40,000 units at $10 per unit, variable operating costs of $4 per unit, fixed operating costs of $30,000, interest of $50,000, and preferred stock dividends of $24,000. The Company is in the 40% tax bracket.
1. Compute XYZ company’s Degree of Total Leverage (DTL) and explain its meaning.
2. If XYZ company’s Earnings Per Share (EPS) is currently $7.2, estimate its EPS in case of a 10% increase in sales revenue.
 
q2__ Hook Industries’ capital structure consists solely of debt and common equity. It can issue debt at 10% interest rate, and its common stock currently pays a $2 dividend per share. The stock’s price is currently $20; its dividend is expected to grow at a constant rate of 5 percent per year; its tax rate is 35 percent; and its WACC is 12 percent.
1. Calculate the cost of debt and the cost of common stock.
2. What percentage of the company’s capital structure consists of debt?

Apr 12 2021 View more View Less

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