62. M&M Proposition 2:Melba’s Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6% and its cost of equity is 10%. The firm’s marginal corporate income tax rate is 35%. What is the appropriate WACC? A) 8.17% B) 6.35% C) 8.80% D) 7.44% 63. M&M Proposition 2:A firm has $300mm in outstanding debt and $900mm in outstanding equity. Its cost of equity is 11% and its cost of debt is 7%. What is the appropriate WACC? A) 6% B) 8% C) 9% D) 10% 64. M&M Proposition 2:A firm has a WACC of 8.5% a pretax cost of debt of 5% a cost of equity of 12% and a marginal corporate income tax rate of 35%. What percent of the firm is financed with equity? A) 50% B) 60% C) 70% D) None of the above 65. M&M Proposition 2:Bellamee Inc. has a required rate of return on its assets of 12% and a cost of debt of 6.25%. Their current debt-to-equity ratio is 1/5. What is the required rate of return on their equity? A) 12.15% B) 13.15% C) 14.15% D) None of the above 66. M&M Proposition 2:Using the information for Bellamee from Question 64 what is its required return on equity if its debt-to-equity ratio changes to 2/5 and this increases the required rate of return on their debt to 7%? A) 14% B) 14.25% C) 14.50% D) 15% Use the following to answer questions 67-69: Suppose that Banana Computers has $1 000 in revenue this year along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14% and the risk-free rate is 5%. Assume that the COGS only includes the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and a YTM of 7.9% to its capital structure. Reference: Ref 16-2 Format: Multiple Choice Learning Objective: LO 1 Level of Difficulty: Medium 67. M&M Proposition 2:What percent of the firm’s costs are fixed and what percent are variable with the added debt? A) 27.9% and 72.1% B) 72.1% and 27.9% C) 25.23 and 74.77% D) 74.77% and 25.23% 68. M&M Proposition 2:What is the net income of Banana without and with the debt? A) $500 and $484.2 B) $484.2 and $500 C) $500 and $465 D) $490 and $500 69. M&M Proposition 2:Suppose revenues fall by $300. What is the percent change in net income with and without the debt? Assume that the total variable productions costs remain the same. A) 64.5% and 60% B) 60% and 64.5% C) 59.2% and 40.8% D) 40.8% and 59.2% 70. M&M Proposition 2:Suppose a firm has a cost of equity of 12% a D/E or 1/6 and the YTM on its bonds is 7.5%. The risk-free rate is currently 3%. What is the current required rate of return on its assets and equity if the D/E is changed to 1/3? A) 11.35% and 13.25% B) 11.35% and 8.25% C) 13.25% and 11.35% D) None of the above. 71. The benefits of debt:Packman Corporation has a reported EBIT of $500 which is expected to remain constant in perpetuity. If the firm borrows $2 000 its YTM will be 6.5% and its coupon rate will be 8%. If the company’s marginal tax rate is 30% and its average tax rate is 20% what are its after-tax earnings? A) $238 B) $272 C) $259 D) None of the above.
